Update: Iron ore futures in Singapore have crashed 9.5%, steel futures plunged 7%, and copper is down 3.5% Wednesday afternoon after Anglo-Australian miner BHP warned of peak iron ore prices.
Bloomberg Industrial Metals Index breaks below support.
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Iron ore futures in Singapore plunged more than 5% to $148.70 a ton and were headed for their fifth weekly loss. Prices have hit five-month lows, not seen since March, as an increase in portside inventories and curbs on steel production weighed on prices.
Overnight, Anglo-Australian miner BHP warned of peak iron ore prices amid China's declining steel production and the latest COVID-19 outbreak, according to South China Morning Post (SCMP).
"Medium-term, China's demand for iron ore is expected to be lower than it is today, as crude steel production plateaus and the scrap-to-steel ratio rises," BHP said in its outlook on commodities.
The parabolic rise in iron ore prices since the pandemic began in early 2020 came to a screeching halt in mid-May when regulators began to wage war against soaring commodity prices. The high cost of iron ore and other raw materials raised concerns over producer price inflation, prompting Beijing to act.
SCMP said by the third week of July, Beijing "unofficially told steel producers in Anhui, Gansu, Fujian, Jiangsu, Jiangxi, Shandong and Yunnan to limit this year's output to that of last year's."
China's Ministry of Finance has also removed export tax rebates on 23 steel products, a move to discourage steel exports.
"China Iron Ore and Steel Association (CISA) President Shen Bin also got in on the action with a 'sucker punch' to prices by vowing to accelerate and ensure China's self-sufficiency in iron ore supply," Navigate Commodities managing director Atilla Widnell said.
By August, steel mills in steelmaking hub Tangshan were told by the government to reduce capacity to fight pollution, ING commodity strategists Warren Patterson and Wenyu Yao recently wrote in a note to clients.
S&P Global Platts forecasts that China's construction steel demand will likely plunge in the second half of the year for the first time in six years.
Copper prices also eased on Wednesday to their lowest point in a month after the global economy appears to be on shaky ground. Even Goldman Sachs analysts are saying this is "not good."
As for industrial metals as a whole, the Bloomberg Industrial Metal index has stalled over the last several months.
A plunge in iron ore prices comes as Chinese credit impulse began to decline earlier this year. Slower credit growth weighs on demand from the construction and manufacturing sectors. The reflation trade usually lags the credit impulse by six or so months. Premium subs were recently made aware that the Chinese credit impulse has bottomed.
If policymakers in China want to bottom out iron ore prices, they must begin to expand credit once again.