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Australian iron ore prices for export to China have fallen sharply from their summer highs as the country curbs steel output.
Economy

Iron ore sinks as market readies for post-congress China

Beijing's aggressive curbing of steel production spooks speculators

TOKYO -- Iron ore prices are turning lower again, after a brief summer rally, with investors unnerved by China's aggressive moves to curb steel production.

Prices rose this summer on expectations that demand for steel construction materials would grow, thanks to Chinese infrastructure investment. But the government has decided to begin restricting steel production in November, a month earlier than usual, dashing the hopes of investors with long positions.

With China's economic outlook murky ahead of the Communist Party's twice-a-decade national congress later this month, the iron ore market is pointing to weaker domestic demand. The spot price for benchmark Australian ore with 62% iron content for delivery to China sank to $61.20 per ton on Oct. 5, a three-month low. It may be headed toward the low for the year, $53, logged in mid-June.

Solid or soft

Iron ore prices surged to the upper-$78 range in late August, and seemed poised to test their February high of $94.50. The summer run-up was driven by speculation that the Chinese government would  increase infrastructure spending to stoke economic growth before this fall's party conference.

But Beijing did not follow the script.

Every year, the government reins in steel production in winter, when China's air pollution becomes acute. Authorities typically impose cuts on steel production from December through February. This year, however, they opted to curb output starting in November in 26 major cities, including Beijing, and to keep the restrictions in place through March 2018. 

The prolonged squeeze also seems intended to deflate a nascent housing market bubble. Some inland cities, including Nanchang, Xi'an and Chongqing, are taking steps to tighten controls on house purchases. In addition to restrictions on purchases of second homes, these cities introduced in late September a new system to restrict the sale of houses within two to five years after purchase.

Year-on-year growth in home sales has been slowing, declining from 26.2% in June to 4.7% in July and 3.4% in August, the smallest increase since March 2015.

"There is a good chance that housing sales in China will start posting year-on-year declines by the end of 2017," said Haku Houshou, chief researcher at Hamagin Research Institute, an affiliate of Bank of Yokohama.

In Tangshan, an industrial city in China's northeastern Hebei Province and a major steel production hub, output curbs have been in place since September. In Handan, also in Hebei Province, and in Zhengzhou, in the central province of Henan, a 50% cut starts in October and is expected to run through March next year.

The early output cuts prodded many speculators into unwinding their positions, said Eli Owaki, an economist at Nomura Securities.

Beijing, which is struggling with worsening air pollution, has banned public works such as road construction in some parts of the city for five months, starting in November.

President Xi Jinping's government will start its second term after the party convention. It is expected to continue to try to hold the financial services industry and some other sectors in check.

While some forecasters, including ABN Amro, a Dutch bank, are predicting the government will not take actions that risk a serious drag on China's economy, the consensus view among economists is that the second half of 2017 will show a slowdown.

A survey by Nikkei Quick News and Nikkei Inc. found the average forecast among China economists was for 6.7% growth in gross domestic product in the July-September quarter, down from 6.9% in the first and second quarters of the year. For all of 2017, the average prediction is for 6.8% growth.

That points to a cooler iron ore market for the time being.

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