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Iron ore price drops as China steps up efforts to curb soaring commodity prices

September iron ore on the Dalian Commodity Exchange ended daytime trading 5.7% lower at 1,142.50 yuan ($177.40) a tonne, after earlier hitting a three-week low of 1,102 yuan.

Rebar on the Shanghai Futures Exchange shed 4.7%, hot-rolled coil dropped 4.5%, while stainless steel slumped 2.8%. Dalian coking coal tumbled 8% and coke lost 4.8%.

The world’s biggest producer of steel products has sharply increased consumption of iron ore and other steel ingredients while ramping up output for use in producing home appliances and construction materials amid robust demand spurred by global stimulus measures.

On Wednesday, China’s cabinet vowed to strengthen its management of commodity supply and demand to curb “unreasonable” price increases and protect consumers.

“Commodity prices have come under pressure overnight amidst the broader risk-off sentiment and as China’s State Council warned about commodity prices,” Tapas Strickland, Sydney-based economist for National Australia Bank told Reuters.

“Still, the pullback in commodity prices overnight needs to be seen in the context of the sharp run-up this year.”

Richard Lu, senior analyst at commodity consultant CRU Group’s Beijing office, said the skyrocketing steel prices “will frighten some consumers at some point.”

“The commodities bull run is definitely not done yet,” Eric Liu, head of trading at Chinese copper trader ASK Resources Ltd. told Bloomberg.

“Every country is grappling with rising inflation, but as long as they don’t actually tighten monetary and fiscal policies, commodity prices can hardly cool off.”

“For the time being, global commodity demand signals are still firing on all cylinders, with the recent weakening still consistent with noise,” TD Securities analysts led by Bart Melek said in a note. But “the context points to risks of normalizing growth.”

Supply

Even though the announcement was expected in a few days, BHP (ASX, LON, NYSE: BHP) reported on Tuesday the delivery of the first production at its South Flank iron ore project in Western Australia.

South Flank is BHP’s preferred option to replace the 80 million tonne-a-year Yandi mine, which is reaching the end of its mine life.

The project is expected to create 2,500 construction jobs, more than 600 operational roles and generate opportunities for Western Australian suppliers. The mine is expected to produce iron ore for more than 25 years.

(With files from Bloomberg and Reuters)

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