Steel and ore markets bet on China stimulus that may not be
Is it time to challenge the conventional wisdom in iron ore and steel markets that poor Chinese data is actually good news because it means Beijing will ramp up stimulus spending, thereby boosting demand?
The current thinking of bad data equals good news was on display this week, with steel prices rallying after economic news showed a growing slowdown in China s factory and consumer sectors. Benchmark Shanghai steel rebar futures gained as much as 2.1% to 3,575 yuan ($505.71) a ton in Monday s trade, the highest in six weeks, before ending 1.5% up at 3,553.
The increase in steel came as industrial production grew at the weakest pace in 17.5 years, climbing just 4.4% year on year in August, down from 4.8% in July and below the median forecast of analysts polled by Reuters for 5.2% growth.
Fixed-asset investment for the first eight months of the year rose 5.5%, below the 5.6% rate forecast by analysts.
Retail sales growth also disappointed at 7.5% in August, down from July s 7.6%, with the drop underlining the notion that China s economy is losing momentum amid the protracted trade dispute with the US.
Since the global recession of 2008, market participants have come to expect that Beijing will simply open up the stimulus taps when confronted with evidence of slowing growth, given the political and social imperative to keep the economy humming along at an annual growth pace of at least 6%.
However, Chinese Premier Li Keqiang said it is very difficult for the economy to keep up a growth rate of 6%, citing the complicated international situation and the increasingly high base from which this expansion has to occur. China faces “certain downward pressure ” from slowing global growth and an increase in protectionism and unilateralism, Li said in an interview published on Monday on the government s website.
The official acknowledgement that China s economy is facing headwinds is likely to fuel expectations of further stimulus over and above measures already taken, such as reducing the reserve requirements of banks three times so far in 2019. Effectively, steel and iron ore market participants are betting the expectation of China stimulus spending will outweigh the reality of slowing growth.
Whether they are placing the correct bet may be answered soon enough, as the upcoming China National Day holidays in the first week of October may provide a suitable stage for government announcements on new efforts to turbocharge economic growth.
In the meantime, it appears hope is trumping reality, with iron ore prices and imports looking robust. Spot 62% iron ore, as assessed by commodity price reporting agency Argus, ended at $97.55 a ton on Monday, just below the prior close of $99.20, the highest in five weeks. The price has rallied 19.7% since hitting an eightmonth low of $81.50 a ton on August 29, amid some optimism that Beijing and Washington will resume trade talks and expectations for more Chinese stimulus.
Iron ore imports are also recovering from mine closures in Brazil in the wake of a fatal tailings dam disaster in January and a tropical cyclone in Australia in late March. Official data showed imports of the steelmaking ingredient at 94.85million tons in August, a 19month high. That figure could well be exceeded in September, with Refinitiv vessel-tracking and port data estimating imports may reach more than 100million tons, although this figure is likely to be revised as the month end approaches. Nonetheless, the strength in iron ore prices and imports, and those for steel are indicative of a sector that expects better times ahead.
Pollution cutbacks in steelproducing regions may also act to support steel prices and margins, which have recovered somewhat in recent weeks, leading to a recovery in production in August. The pollution control measures may also result in mills shifting to highergrade iron ore in a bid to maximise the steel produced for each ton of the raw material.
Overall, for a bullish view of the steel and iron ore sectors to be justified, it will need broadbased stimulus that supports all the major pillars of steel demand: residential building construction, infrastructure projects, and manufacturing such as cars and white goods. /
ACKNOWLEDGEMENT THAT CHINA S ECONOMY IS FACING HEADWINDS IS LIKELY TO FUEL EXPECTATIONS OF FURTHER STIMULUS
POLLUTION CUTBACKS IN STEEL-PRODUCING REGIONS MAY ALSO ACT TO SUPPORT STEEL PRICES AND MARGINS