Iron ore prices, traditionally influenced primarily by demand and supply factors in the physical market, are showing signs of becoming “financialised” as paper trading increasingly plays a part in driving prices.
“Iron ore prices are being pressured by declining Chinese equities and a depreciating [yuan],” Citi’s analysts said in a report. “Macroeconomic developments and financial market positioning are increasingly impacting iron ore prices as paper trading grows, leading iron ore to more resemble copper, oil and other financialised commodities.”
Canadian brokerage RBC Capital Markets’ analysts also noted that concerns over the yuan’s devaluation and the recent decline in the Chinese stock market has eroded sentiment, while tight credit has also dampened buying interest in iron ore.
“We expect weak steel fundamentals and global iron ore oversupply to continue to weigh on iron ore prices,” they added.
China consumes around 45 per cent of the world’s steel while some 69 per cent of global seaborne iron ore supply goes to the nation, which has ample but low-quality iron resource that is costly to process into usable output.
The price of iron ore with 62 per cent iron content delivered to mainland shores has fallen around 4 per cent since the start of the year to US$41.5 a tonne after bottoming around US$38.3 on December 11. It declined over 40 per cent over the course of last year.
RBC’s analysts forecast this year’s average price to fall 21.8 per cent to US$43 a tonne from last year, after plunging 43.3 per cent last year from 2014.