Iron Ore Prices Retrace 12% from Two Year Highs, Dragging Aussie Dollar Down

Iron ore prices have fallen over 12% from a two year high earlier this month over $US145 a tonne to $US127.5 on Tuesday. Prices had risen on expectations of healthy iron ore demand for winter restocking amongst growing optimism that Beijing’s latest round of stimulus to revive China’s troubled property market. China has continued to struggle; shipping has been impacted by the Red Sea attacks as a result commodity prices including iron ore have sold off. Commodity price sensitivity is a major factor in markets pricing the Australian dollar. Already in 2024 thermal coal prices have lost 11%, iron ore is down over 7%, 12% off those two-year highs and copper is off nearly 3 per cent and nickel prices are also lower.

rio tinto iron ore mine
Rio Tinto Iron Ore Mine

The recent move higher has been driven primarily by sentiment and optimism; with that the Australian dollar has reversed with those commodity prices, coal and iron ore are Australia’s biggest exports. The AUDUSD rate fell to US65.78¢ on Tuesday, down over 3 per cent since the last day of 2023, December 28’s five-month high US68.71¢.

The US dollar has rallied across the board in the New Year with rates rising and some rebalancing after the heavy selling since late October last year when the Fed pivoted. Iron ore prices also got ahead of themselves after they had quickly recovered almost 50% of the move from around $225 to $76 in the end of year rally.

The benchmark February iron ore on the Singapore Exchange has fallen in 2024 after the price recovered 50% of the move from around $225 from 76.

Iron ore prices had risen 25% in 2023 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.

Baosteel, China’s largest steelmaker warned of sluggish demand, ANZ Research analysts said in a research note. Iron-ore prices will likely continue to be weighed down in the absence of favorable policies, Nanhua Futures analysts say in a note. The most traded iron-ore contract on the Dalian Commodity Exchange is down 0.7% at CNY937.5 a ton.

Iron-Ore Inventory Levels Rose for Sixth Straight Month

in the yo-yo reactions to can China recovery and how much stimulus will be needed weakness in commodities has been attributed to fears of weaker demand from China. With that iron ore stockpiles in China have risen for the sixth straight month. Chinese steel mills have increased more than 16% to 14.4 million tons in early January, according to China Iron and Steel Association. Economic activity is needed to eat through that to drive demand. The previous iron ore bull markets were all supported by either expanding Chinese steel production or tightening supply from the iron ore majors.

Deflationary concerns continue to hamper China.

  • China’s December CPI was up 0.1% m/m (expected 0.2%; last -0.5%) but down 0.3% yr/yr (expected -0.4%; last -0.5%). December PPI was down 2.7% yr/yr (expected -2.6%; last -3.0%).
  • China’s December trade surplus reached $75.34 bln (expected surplus of $74.75 bln; last surplus of $68.39 bln) as imports rose 0.2% yr/yr (expected 0.3%; last -0.6%) and exports increased 2.3% yr/yr (expected 1.7%; last 0.5%).
  • December New Loans reached CNY1.17 trln (expected CNY1.40 trln; last CNY1.09 trln) and total social financing reached CNY1.94 trln (expected CNY2.20 trln; last CNY2.45 trln).

The failure is worrisome as only last month 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.

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.

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.

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. All three companies stock markets hit record highs in the last days of 2023. The S&P/ASX 200 closed the year up 7.8% – its best return since 2021. In 2022 it lost 5.5%.

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 last year.

Source: Reuters, TradersCommunity

From the TradersCommunity Research Desk