Iron Ore Gets Its Groundhog Day Moment as Tumble Follows Surge

(Bloomberg) -- Iron ore is having a Groundhog Day moment. Prices that were pumped up on speculative enthusiasm just capped the biggest weekly drop in six months, echoing a sharp rise and tumble seen in April and May that was driven by a surge and fade in trading in China, the largest buyer.

“The government again is reacting and trying to put some limits,” Philip Kirchlechner, director of Iron Ore Research Pty and former marketing head at Fortescue Metals Group Ltd., said by phone on Friday, referring to moves by China to rein in trading of raw materials futures, including iron ore. “You’re looking at this really speculative inflow of money.”

Iron ore is retreating from the highest since 2014 as authorities in China raised trading charges to quell the spike in speculation in commodities, including iron, steel and coking coal. The upsurge in iron ore was given additional impetus as Donald Trump’s surprise victory in the U.S. presidential contest last week spurred bets raw material demand would rise on the Republican’s pledge to rebuild U.S. infrastructure. That effect is waning, too.

“Don’t forget that most of the steel production in the U.S. is from electric-arc furnaces, not blast furnaces: their use of iron ore is relatively limited,” said Kirchlechner, referring to making steel from scrap rather than ore. “The Trump victory is only a factor to the extent of the psychological impact.”

Ore with 62 percent content delivered to Qingdao lost 1 percent to $72.79 a dry metric ton on Friday, taking the week’s loss to 8.8 percent, the most since the period to May 6, according to Metal Bulletin Ltd. In Singapore, SGX AsiaClear futures slumped 15 percent this week, while futures in Dalian fell 10 percent.

BHP’s View

This week’s losses come as BHP Billiton Ltd., the world’s largest mining company, again highlighted its view that given expansions in supply, iron ore prices will probably trend lower. BHP Chief Executive Officer Andrew Mackenzie told reporters on Thursday iron and coking coal will probably “drift back” after prices were boosted by restocking and short-term supply disruptions.

The raw material has also dropped as the dollar jumped on speculation the Federal Reserve will raise interest rates as soon as next month. The Bloomberg Dollar Spot Index has rallied for the past two weeks to the highest level since February. A rising greenback makes commodities priced in the dollar more expensive for holders of other currencies.

In April, iron ore prices surged 23 percent amid a speculative frenzy in China on signs demand in the Asia’s largest economy was more robust than expected. After banks warned the run-up was unjustified and local authorities stepped in to quell the excesses, prices sank 24 percent in May.

“After Chinese exchanges took steps to suppress market speculation, there’s been a massive pullback” in prices, Fan Lu, an analyst at Sinosteel Futures Co., said in a note on Friday. “We expect the volatility in iron ore to prevail in the short term.”

Probably Peaked

Iron ore at current levels is good for the industry and has exceeded what many would have hoped for a few months ago, Ole Hansen, head of commodity strategy at Saxo Bank A/S, said in a Bloomberg TV interview on Thursday. Prices have probably peaked for now, according to Hansen.

Goldman Sachs Group Inc. was among lenders that said the surge in iron and copper prices was too fast, and that gains would probably not prove to be lasting. Goldman said in a report on Nov. 11 iron ore and copper’s reaction to the Trump win was excessive.

Miners have been whipsawed. In Australia, Fortescue’s stock dropped 7.8 percent this week after soaring 19 percent last week, while in London, BHP has lost 3.2 percent as Rio Tinto Group dropped 4 percent. Brazil’s Vale SA is 4.6 percent lower since Monday.

--With assistance from Sharon Cho To contact the reporter on this story: Jasmine Ng in Singapore at jng299@bloomberg.net. To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, Jake Lloyd-Smith