The selloff in iron ore accelerated on Friday, taking the price loss for the week to around 10%, according to trading on the Singapore Exchange (SGX).
The price of 62% Fe fines (the so-called Pilbara blend benchmark) ended at $US117.90 a tonne on Friday on the SGX, down from $US130.79 the previous Friday and 2023’s high of $US132.15 a tonne on March 15.
Friday’s close was the lowest since January 10 and slashed the year to date gain to around 3%, but was still 50% above the year low of $US79 a tonne last October.
But a year ago iron ore prices were around $US145 a tonne in the wake of the Russian invasion of Ukraine, so the impact on revenue and earnings in the current quarter and half is going to be very telling for the industry majors.
The share prices of the big three local iron ore miners – Rio Tinto, BHP and Fortescue Metals – have gradually followed the price lower in the past month after big gains in January on the China re-opening story. Year to date, BHP shares are down 3.7%, Rio shares are off 0.8% and Fortescue shares are off 0.4%. All three were substantially high in January and February.
Shares in Vale, the big Brazilian iron ore group have followed the same path this year and especially since early March.
Signs of stronger Chinese economic data could see the iron ore prices rebound in coming months and in turn drag the share prices of the big three Australian miners higher.
The fall in iron ore prices and in the value of the shares came as traders start to question the nature and strength of China’s economic re-opening on top of rising gloom about the global economy, especially in the wake of the banking crisis.
Iron ore imports into China totalled 194.2 million tonnes in the first two months of the year, up 7.3% and crude steel production was up 5.6% to 157.8 million tonnes.
But crude steel production for the two months, while up on 2022, was down from 2021’s 174.89 million tonnes, a sign of underlying weakness in demand.
This week sees another test of the health of the Chinese economy with Friday’s official National Bureau of Statistics report on the pace of economic activity in the economy (manufacturing and services) in March.
The January and February reports were solid but the actual economic data for the January-February two month period was weak in comparison, especially retail sales. Trade was also weak with exports and imports falling for the two months.
As ANZ Banking Group analysts said in a note on Friday about the oil market, “The market is also becoming increasingly impatient with the rebound in economic activity in China. While travel has picked up sharply, consumer spending remains subdued.”
Those comments apply to iron ore as much as oil.
What is now becoming apparent is that the new Chinese government of President Xi Jinping wants to expand consumption, not grow demand for products like steel via revamping and recapitalising the still weak property sector
China’s economic growth target for 2023 is a relatively low 5%, and it’s possible that this could be achieved largely through rising consumer spending, although sales of motor vehicles, especially new Energy vehicles have started the year amid a growing price war and slow growth in demand.
A story at the weekend in the Government tabloid, Global Times, underlined the consumption push with this quote: “As China’s economy enters a new stage, the country’s next world-class economic influence will likely come from its massive consumer market.”
“Therefore, China’s future economic growth needs to be more focused on innovation. Meanwhile, the globalization trend has been reversed, China’s economy needs to be driven more by the domestic market.
“In face of a changing international environment, China’s policymakers proposed the “dual circulation” development strategy, namely focusing on the domestic economy and features positive interplay between domestic and international economic flows. As for the domestic flow, the key is to promote the circulation of supply and demands.”
Shorn of the gobbledegook, this means the Xi government is looking to make China as self-sufficient as possible and will curtail demand for commodities such as iron ore, copper and oil by producing more internally or sourcing them from friends like Russia.
At the same time, instead of exporting consumer goods, domestic demand will be stimulated to the point where it will be better for exporters to redirect their products and services back into the local market.
That helps explain why the struggling residential property sector will not be rescued (in the old-fashioned way) but rather, gradually massaged back to health by stimulating demand for houses and units.
The sector did see some improvement in the first two months of the year, but most indicators are still in negative territory, so ultimately it’s still a drag on steel demand.
The first two months of the year saw a 5.7% drop in property investment, although this was an improvement on the decline of 10% for 2022 as a whole. New housing starts declined 9.4%, still negative but better than the 39.4% slump in December.
No matter what domestic consumption ideas the Xi government comes up with, the weak health of property will hang over the entire economy, depress demand and keep consumers hesitant and worried, not confident and spending. And that will make for a volatile iron ore market.
