Iron ore prices stabilised on Tuesday after a frantic start to the week which saw the price plunge 2.2 per cent to near seven-week lows.

The fall came after the China Banking Regulatory Commission put pressure on banks to introduce tougher lending requirements for iron ore import loans. The main iron ore future contract in China fell almost 5 per cent in response to the news – the biggest drop since the contract was launched in October 2013.

On Tuesday afternoon, the iron ore price dipped slightly to $108.30 a tonne, down from $108.60 on Monday. The price of iron ore – the main ingredient used to make steel – is crucial to the profitability of some of the world’s largest mining companies, including BHP Billiton, Rio Tinto and Vale.

The Chinese government has become increasingly concerned by the use of commodities – in particular copper and iron ore – as collateral in financial deals. Some companies have used borrowings for non-industrial business ventures, such as investment in real estate, raising fears over possible defaults.

Melinda Moore, an analyst at Standard Bank, said: “The market panicked yesterday over Beijing’s loans investigations.” She added that it was “unlikely that significant amounts of iron ore are being used for collateral, and we do not expect any big enforced regulatory destock as a result of the CBRC’s findings”.

The CBRC issued a document on April 18 encouraging local governments to start investigating iron ore financing and produce reports by April 30.

“It will be interesting to see whether the CBRC releases anything publicly after they get the information back tomorrow,” Ms Moore added. “If banks have not been taking much iron ore as collateral, the issue may die. There’s obviously some uncertainty.”

Colin Hamilton, head of commodities research at Macquarie, said that the sharp price movement on Monday reflected iron ore’s sensitivity to China, where the government in turn is looking to reduce inefficient capital allocation and limit its shadow finance sector.

“The market is very sensitive to changes in Chinese sentiment, and the potential for increased financing costs will make participants nervous” he said. “There’s a move to crack down on iron ore being used for anything other than its usual physical purpose.”

In March, iron ore reached an 18-month low amid concerns over weakening Chinese demand and tighter credit restrictions. China consumes around two-thirds of the world’s seaborne supply of iron ore.

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