Iron ore prices recovered strongly despite the gloomy Chinese economic outlook

Rising prices reinforce BHP's view last week that China, the world's largest producer and consumer of iron ore, will still produce more than a billion tonnes of steel this year.

The strong rise in the iron ore market contrasts with China's recent lackluster economic data. It is noteworthy that prices rose even as companies in the real estate sector, the largest users of steel, are facing debt and cash flow problems.

The most traded iron ore contract on the Singapore Exchange was up 13.5% in the two weeks to August 25; Iron ore imports into Chinese seaports also increased at a similar rate.

In the latest session, on Wednesday (August 30), iron ore for September 2023 on the Singapore Exchange increased by 0.6% compared to the previous session, to 112.85 USD/ton. Meanwhile, iron ore for January 2024 on the Dalian Commodity Exchange (China's) rose 0.62% to 818 yuan ($112.26) per ton.

Investors are buoyed by the expectation that China will roll out new measures to support the real estate sector. Accordingly, it is reported that some Chinese state-owned banks will soon lower interest rates on existing mortgages. On August 28, Beijing halved the registration tax on securities transactions to boost the struggling market.

Analysts said most Chinese steel mills are maintaining normal production to continue to generate cash flow and lock in profits, which is supporting ore demand.

Mills are also relying more on hot metal, the precursor of steel, to consume more iron ore, as scrap steel is in short supply amid a downturn in the real estate market.

“The reason behind (price increase) is the market is increasingly anticipating that the Government will soon introduce a limit on steel production nationwide. However, the underlying driving factors are unusually high hot metal production and low inventories at a time of slowing seasonal demand,” said Pei Hao, senior analyst at international brokerage. FIS, based in Shanghai, said.

Beijing has so far not imposed any restrictions on annual steel output, different from what it has done in the past two years to limit carbon emissions, although some mills have received notices. oral report.

Even before the recent rally, iron ore prices were supported by China's unusually high output of the hot metal. Hot metal is an intermediate steel product from the blast furnace in liquid form that will be used directly to produce steel but when cooled into ingots is often called cast iron.

“Hot metal production is an important indicator,” said FIS analyst Pei. As long as production doesn't fall sharply, iron ore consumption should be maintained, supporting prices."

Low reserves

Low iron ore inventories at mills and ports are also supporting prices, analysts said. Steel mills have been reducing inventories since the second half of 2022 to preserve cash.

Data from consulting firm Mysteel showed that imported iron ore inventories at 247 Chinese steel mills as of August 25 stood at 85.39 million tonnes, down 13.5 percent from a year earlier.

According to consulting firm Steelhome, iron ore inventories at major Chinese ports fell to 118.6 million tons as of August 25, 15.5% lower than a year ago.

With low inventories, steelmakers have to buy on the spot market to meet demand, due to strong short-term demand. That acts to support prices.

Tomas Gutierrez, head of data analytics at consulting firm Kallanish Commodities, based in the UK, said: “Some steel mills have bought iron ore on the spot market to fill up their stockpiles. thereby pushing up the price of iron ore.

Pressure hinders the upward momentum

However, the rally in iron ore prices may not last. In addition to the prolonged weak real estate market affecting the Chinese economy, rising iron ore prices also reduce the profit margins of factories.

Information from a large Chinese steel mill said that the sudden increase in iron ore prices has significantly reduced the profit of the steel industry.

“A month ago, some factories were still able to make a total profit of 400 yuan ($54.87) to 500 yuan per ton, but now, most factories are struggling. to make profits", information from the above mentioned large steel factory said.

CafeF