Iron Ore at Eighteen Month Highs as China Walks a Tightrope Trying to Save Property Market

Iron ore prices climbed to eighteen-month highs on expectations of healthy iron ore demand for winter restocking amongst growing optimism that Beijing’s latest round of stimulus will revive China’s troubled property market. December futures prices for iron ore cargoes with a 63.5% iron ore content for delivery in Tianjin rose to $139 per tonne the highest since June 2022. The benchmark January iron ore on the Singapore Exchange rose 1.4% to $US137.55 a tonne, up 2.7% for the week. The move means the price has recovered 50% of the move from around $225 from 76.

rio tinto iron ore mine
Rio Tinto Iron Ore Mine

The latest push came from five of China’s largest state banks, including the China Construction Bank, lowering their interest rate on their deposits in the country’s latest push to stimulate economic activity.

Iron ore prices have risen 25% so far this year on higher demand from China after Beijing reopened plants following the zero COVID lockdown experiment. Last month Chinese regulators began drafting a list of 50 real estate developers eligible for a range of financing. Developers that would have access to financing include companies such as China Vanke and Longfor Group. Policymakers stated an additional CNY 1 trillion of debt would be issued to target infrastructure and manufacturing projects.

 iron ore cargoes with a 63.5% iron ore content for delivery in Tianjin

China is a walking a tightrope trying to reverse the tailspin of the collapsing property market, the largest in the world. Against that is with their goal to phase out the Chinese economy’s overdependence on new property construction and their attempts to control iron ore prices. Iron ore demand for next year has become underpinned by short covering and those betting China has little choice for more infrastructure spending by Beijing.

The benchmark January iron ore on the Singapore Exchange rose 1.4% to $US137.55 a tonne, up 2.7% for the week. The move means the price has recovered 50% of the move from around $225 from 76.

Higher iron ore prices are a boon for Australia.

The ASX materials sector largely tracks the higher iron ore price, dominated by mining giants BHP Group, Rio Tinto and Fortescue Metals Group.

  • The S&P/ASX 200 closed the week at 7501.6 up 0.8% in the fourth consecutive week of gains. Gains in energy and real estate offsetting a drag in consumer staples.
  • The benchmark closed just 1.6% below its record top of 7632.8 set in 2021.
  • Fortescue traded at record highs of $28.4 intraday and closed up 1.1% at $28.35.
  • Rio Tinto tested Thursday’s record high of $135.4 but closed the day at $134.40.
  • BHP Group was unchanged at $49.73, within a whisker of the 2023high at $50.21.

Iron ore prices have leapt 25 per cent so far this year on higher demand from China after Beijing reopened plants following a harsh COVID lockdown.

The risk is the Chinese property sector’s liquidity crisis will continue to hamper demand for iron as metallurgists turned down steel output to match lower demand from constructors, underscored by a decline in new home purchases.

Morgan Stanley’s in January issued a note on iron ore about China Minerals Resources Group (CMRG), the Chinese government’s new central buying function for iron ore. They still expect a tighter iron ore market in the months ahead, which should push the current rally into 2Q23. MS compares iron ore’s past bull market from peak to trough, since the inception of spot pricing.

A consideration should be given to the Chinese National Development and Reform Commission having flagged it will closely monitor speculatory price increases and crack down on misleading information to inflate prices amid the metal’s rally this year.

MS Highlights

  • MS notes the current market is being driven primarily by sentiment/optimism, they still expect the iron ore market to tighten into 2Q.
  • The previous 9 bull markets were all supported by either expanding Chinese steel production or tightening supply from the iron ore majors

Source: Morgan Stanley, Reuters, TradersCommunity

From the TradersCommunity Research Desk