Iron and Metals Slump as Moody's Puts China Debt in Spotlight

(Bloomberg) -- Iron ore led a slump in industrial commodities after Moody’s Investors Service downgraded China’s credit rating and warned that the country’s debt position will worsen as its economic expansion slows.

Iron-ore futures on the Dalian Commodity Exchange fell as much as 5.6 percent to 452 yuan a metric ton, almost by the daily limit, before closing at 455.50 yuan, extending Tuesday’s 3 percent loss. Nickel led a broad slump among base metals, dropping as much as 2.8 percent to $9,085 a ton on the London Metal Exchange. Nickel stockpiles rose the most in more than a year.

The move by Moody’s, which downgraded China’s debt to A1 from Aa3, adds to concerns about the effects of a slowdown in the country’s economic growth, following on from downbeat manufacturing readings and weak commodity imports, Simona Gambarini, an analyst at Capital Economics Ltd., said by phone from London. “We’re not particularly concerned about credit growth getting out of hand, but in regards to industrial metals, we have been negative on the outlook for some time on the basis that Chinese growth will slow.”

President Xi Jinping’s government is seeking to meet its target of 6.5 percent economic growth this year while attempting to address excess leverage and deflate assets bubbles. China will become increasingly reliant on policy stimulus, including spending by government and state-owned entities, to prop up growth, Moody’s said. China’s finance ministry called its assessment “absolutely groundless.”

Raw materials have benefited in the past year from a credit and infrastructure splurge that’s supercharged China’s so-called old economy, lifting demand and prices to varying degrees. Steel reinforcement bar hit a five-year high this week, while the index of the six major LME metals rose to a three-week high, even as signs of tighter lending conditions had begun to emerge.

Recent efforts to rein in credit will have a gradual impact on industrial-metals demand as the government scales back investments, particularly in infrastructural projects, Capital Economics’ Gambarini said. “The economy is not going to plummet, but we’re likely to see a gradual decline in growth to avoid credit getting out of hand,” she said.

LME copper dropped 0.6 percent to settle at $5,682 a ton while aluminum gained 0.1 percent, the only metal to rise. Steel rebar for October delivery on the Shanghai Futures Exchange closed 1.5 percent lower.