Finally, some reality set in for the ferrous complex on June 20, 2022:

The rout is being led lower by steel prices in China:
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I don’t think that it is unreasonable to expect a return to the 3500 range for rebar. To wit:
“Construction starts have not been strong and finally the orders have stopped,” said Colin Hamilton, head of commodities research at BMO Capital Markets. “Steel mills are now having to cut production.”
Traders said videos on WeChat, China’s popular social media app, allegedly showing huge stockpiles of steel had spooked the market.
The property sector accounts for up to 40 per cent of Chinese steel demand, but new home starts have tumbled this year as Beijing has moved to bring prices under control and rein in debt levels at big developers.
“May was particularly bad, down somewhere between 30 and 40 per cent year on year on new starts,” said Hamilton.
At the same time, the country’s vast steel industry has continued to hold production steady, with output in May annualising at more than 1.1bn tonnes.
That in turn has weighed on the steel market. The price of reinforcement bars, a product widely used in the construction industry, is down 20 per cent since the start of May, which has hit corporate profitability.
“It is all about the margin picture . . . and they are very weak to negative right now,” said Peter Hannah, index manager at Fastmarkets, referring to the profitability of Chinese steel mills. “Something has got to give.”
A year ago, iron ore hit a record high of above $230 a tonne, as demand surged in line with the global recovery from the pandemic. Prices then fell sharply in the second half of the year after Beijing ordered its vast steel industry to rein in production in an effort to cool its economy. The commodity traded at $119 at the end of 2021.
That volatility has alarmed Chinese policymakers who are now moving to consolidate the country’s iron ore imports through a new centrally controlled group by the end of this year. The biggest suppliers to China are Brazil’s Vale and Australian groups BHP, Rio Tinto and Fortescue Metals Group.
Hannah said the fear stalking the market now was whether Chinese steel production could remain at an annualised rate of above 1bn tonnes “when margins are so pressured”.
Hamilton said he expected to see iron ore at $100 a tonne “sooner rather than later”.
Here is the problem:

I use the rolling annual for housing area starts as a way to capture the delays in material demand through the construction process. It proved a useful measure in the 2015 property crash, closely pinpointing the bottom for steel demand and iron ore prices.
As you can see, it is a big problem for most of H2. And this includes a full recovery of sales volumes to 2021 levels over the next quarter. Of course, it might be better, or worse. The latest sales data has bounced but it is exaggerted by holiday timing:
Bloomberg has more:
Blast furnace rates in Tangshan fell last week for the first time since mid-May, with industry consultant Mysteel saying in a note that more mills in the steel-making hub are cutting output to do maintenance due to weak margins. An index of Chinese steel profits has plunged by almost 90% so far this month.
“With the slow spot trade, steel product prices have plunged, with more steel mills now losing money and hastening planned maintenance,” said Wei Ying, a ferrous analyst at China Industrial Futures. However, given the speed of the drop, iron ore “may have been oversold” and there’s likely to be a rebound in the second half, she said.
Daily spot trading of construction-related steel products is around 11 to 13 million tons now, compared with 17 to 19 million tons usually, Wei said.
Steel mills struggling even as coking coal also plummeting
Downstream demand remains poor with few spot trades occurring, and the bleak outlook for China’s construction industry continues to test market confidence, Mysteel said in a separate note. A raft of supportive policy measures from Beijing in the last couple of months have failed to result in persistent price gains, with risks due to the virus and the Covid Zero policy continuing to hang over the market.
Chinese steel mills have ramped up output since late last year, and appear to be betting that infrastructure stimulus and a swift rebound in property construction will support demand in the coming months, GavekalDragonomics said in a note by analyst Rosealea Yao on Monday. Unless the real-estate sector mounts a stronger rebound soon — which remains far from certain — the tension between high output and weak demand will have to be resolved with lower prices, big cutbacks in production, or both, she said.
The infrastructure ramp-up cannot compete with this property downdraft for much of H2 and huge steel inventories cover it anyway.
With the global recession moving front and centre more broadly, which is breaking down the commodity mania, and a trade shock looming over China next, the bulk commodities appear to be headed directly into a perfect storm.
Remember, iron ore is always more volatile than anybody expects so the likelihood is we go much lower than $100!
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
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