Iron ore under pressure over cash squeeze concerns
Prices likely to fall with mainland mills reluctant to restock and keen to sell over liquidity squeeze
Spot iron ore prices are likely to retreat this week with mainland mills holding off on restocking amid concerns over a cash squeeze in the world's top market, which is already reeling from slower steel demand.
Shanghai steel futures fell yesterday, tracking steep losses in mainland equities on worries that the central bank would keep money tight and economic growth could slow sharply.
The most traded rebar contract for October delivery on the Shanghai Futures Exchange dropped 1.2 per cent to close at 3,450 yuan (HK$4,320) a tonne.
The People's Bank of China said overall liquidity in the financial system is at a reasonable level, after interest rates for short-term funds spiked to extraordinary levels last week as big commercial banks held back on lending in the interbank market.
A liquidity squeeze may prompt steel mills to rush to sell their inventory of steel products, resulting in lower prices that will hurt their profitability or widen their losses, an iron ore trader in Hong Kong said.
"It will make mills very reluctant to buy more iron ore, and we could see steel production cuts in July. These are tough times," the trader said.