Iron ore futures in Asia steadied on Thursday, reflecting weak buying interest in the raw material after last quarter's rally as supply rises and Chinese steel prices pull back from recent highs. The January-to-March rally that lifted spot iron ore by 24 percent was largely driven by a pickup in China's steel market that pushed steel prices higher as well as raw material like iron ore, said Daniel Hynes, senior commodity strategist at Australia and New Zealand Banking Group.
"But ultimately it's going to be short-lived with the structural overcapacity issue that the market has to deal with, which ultimately will mean less steel production and weaker iron ore demand," Hynes said. Amid a bleak outlook for iron ore and steel, Australian miner Arrium Ltd was placed in voluntary administration after the collapse of a $927 million recapitalisation plan, putting the jobs of its 7,000 workers at risk.
The most actively traded September iron ore contract on the Dalian Commodity Exchange closed up 0.4 percent at 377.50 yuan ($58.31) a tonne, not far above Wednesday's one month low of 368.50 yuan. On the Singapore Exchange, June iron ore rose 0.6 percent to $49.40 a tonne by 0725 GMT.
There was limited trading activity in the physical iron ore market so far this week, traders said, following weeks of buying by both traders and mills that lifted the benchmark spot price to a nearly nine-month high of $63.30 in early March. Underlining slow demand, stocks of imported iron ore at China's ports reached 97 million tonnes on April 1, the highest since late April 2015, based on data tracked by consultancy SteelHome. Iron ore for immediate delivery to China's Tianjin port slipped 0.4 percent to $53.80 a tonne on Wednesday, according to The Steel Index.
"I think over the next few months we're likely to see prices a little bit lower than where they have been," said ANZ's Hynes. "But we do still feel we're probably past the worst, past the low point in the cycle. We don't necessarily see them going back to sub-$40." Iron ore touched $37 a tonne in December, its weakest since at least 2008.
China's major steel mills have incurred combined losses of 11.4 billion yuan ($1.8 billion) for the first two months of this year as chronic oversupply weighed on the sector. The Fitch Ratings said China's plan to cut steel capacity by up to 150 million tonnes by 2020 would mean the loss of around 500,000 jobs, and "potentially more in ancillary industries."
Given the tough challenges, rapid capacity elimination in China may be unlikely, it said. "This would in turn mean prices are likely to remain low, resulting in higher liquidity and default risks for steelmakers, many of which expanded rapidly since 2012 funded by short-term debt," Fitch said. Construction-used rebar on the Shanghai Futures Exchange closed up 0.3 percent to 2,191 yuan a tonne, below a nine-month high of 2,240 yuan reached in March.