The Evergrande Crisis Could Cause Chaos In Commodity Markets

China’s move to clean up its heavy-polluting industrial sector has triggered a swift collapse in iron ore prices for the first time since July 2020.

Prices last Friday and Monday dipped below the $100 per ton mark.

According to a draft guideline released on Thursday, the Ministry of Ecology and Environment intends to monitor 64 regions during its winter air pollution campaign.

Evergrande crisis sparks concerns over the Chinese economy

Iron ore, copper, and other commodities may be further hammered following news of the crisis at Chinese developer Evergrande. Markets across the globe fell sharply Monday as Evergrande, one of the biggest property developers in the country, Evergrande threatened to default on loans worth U.S. $300 billion.

This has sparked off worries about the economy. It could also cause downturns in construction and demand for raw materials.

Iron ore’s fall

Since May, iron ore prices have fallen by more than half. China, the world’s biggest steelmaker, has tightened production curbs. Furthermore, China’s property market is experiencing a sharp downturn.

MetalMiner has previously reported on China’s move to cut down its steel production to curb pollution.

The Chinese government has announced plans to scale down the steel industry, which accounts for between 10-20% of its carbon emissions. The country has also raised tariffs on steel-related exports, effective as of Aug. 1, 2021.

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For example, the tariff on ferrochrome, a stainless steel ingredient, doubled from 20% to 40%. Due to its slump, iron ore is one of the worst-performing major commodities.

Iron ore is a notable outlier in a broader boom.

Aluminum prices have hit a 13-year high. Natural gas prices have soared, as Stuart Burns reported yesterday. In addition, coal futures have surged.

Toward the end of last week, futures for iron ore dropped over 20%. Iron ore futures traded at $99.55 per ton Friday morning in New York.

Steel prices have been rising all year, even as iron ore prices have declined. Since the middle of July, the price of iron ore, which is an important component of steel, has plummeted more than 40%. In complete contrast, the steel industry is booming.

One of the many reasons for this is China’s decision to reduce steel output. The country manufactures 57% of the world’s steel. Any decision to reduce production is bound to have an impact on the market for steel and iron ore.

Looking ahead

As the world’s biggest steelmaker works toward reaching carbon neutrality by 2060, it is further curtailing production.

Steel and iron ore markets are tracking how the Evergrande situation unfolds.

Already, concerns are growing about a bigger economic crisis in China. Such a crisis could put downward pressure on a lot of the commodities that the country consumes. Steel and iron ore could be the casualties of an economic downturn in China.

By AG Metal Miner

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