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Iron Prices Climb As China Reboots Its Economy

  • China’s lockdowns have weighed on its manufacturing industry this year.
  • Now that it is beginning to open up its economy, Chinese steel producers are ramping up production.
  • Iron ore prices are on the rise, but some believe it could just be a dead cat bounce.

It’s still touch-and-go for the steel sector in China despite the sprouting of the first shoots of a possible manufacturing recovery. However, last Monday, benchmark iron ore prices in the country gained a surprising 7%. This is the biggest daily rise in two-and-a-half months. Is it a sign that we should be more optimistic or just a dead cat bounce?

China’s Slow Road to Recovery

Chinese manufacturing activity has thus far been down in 2022 due to a fresh COVID-19 outbreak. However, since mid-May, the market has shown some signs of recovery, particularly in the country’s economic hub of Shanghai. Nevertheless, experts expect steel demand to remain lackluster until manufacturing production returns to normal in June.

S&P Global Commodity Insights reported that China’s manufacturing production index for steel consumption fell by 28 points from 2021 and 16 points from 2020. These aren’t exactly hopeful numbers, and experts are concerned about the pace of recovery despite the stimulus package.

India Playing Hard Ball on Tariffs

The aforementioned 7% rise in iron ore futures is puzzling. First, it comes on the heels of India raising export duties on some commodities to rein in inflationary pressures. Specifically, the country increased duties for iron ore and steel intermediates. This included raising new iron ores and concentrates tariffs from 30% to 50%. On the other hand, Pellet duties went from zero to 45%. According to a report in the Financial Post, tariffs on coking coal and coke were removed altogether.

This week, the most-traded iron ore futures on the Dalian Commodity Exchange (for September delivery) were up 4.4% at $129.18 (864 yuan) a ton. This was after a surge of as much as 6.9%, the highest since May 6th. Some experts believe India’s move may not impact China’s iron ore inventories as much as initially thought. After all, it only represented about 3% of China’s total imports in 2021. The same goes for the first four months of this year. Overall, Chain’s purchase rate from the subcontinent has stayed low due to increasing demand in India & the falling iron ore prices.

Iron Ore Prices in China Nevertheless Up

News agency Reuters recently reported that we could see a new rally of iron ore prices. They specifically cited the Chinese Government’s decision to cut its benchmark interest rate for mortgages by an unexpectedly wide margin. It’s true that prices reacted rather quickly to this news.

According to Argus, spot 62% iron ore for delivery to north China was up to $135.90 a ton on May 20. That’s an increase of 5.7% from the previous day and the best close since May 6. Domestic iron ore futures on the Dalian Commodity Exchange were also stronger. However, they were up by a much more modest 3.4% to end at $123.62 (827 yuan) a ton on May 20.

China lowered the five-year loan prime rate by 15 basis points to 4.45%  on May 20. This represented the biggest reduction since the country revamped its interest rate mechanism in 2019. Analysts felt this new move was largely an attempt to prop up the property and construction sectors. These sectors account for about 25% of the country’s economy. In addition, Chinese Premier Li Keqiang said Beijing would step up policy adjustments to return the world’s second-biggest economy to “normal growth.”

According to the same report cited earlier, some experts believe a rally around iron ore prices was on the card. After all, such measures had clear implications for iron ore and steel demand. Moreover, initial signs suggest China was already on its way to increasing steel output after the winding down of winter pollution curbs and the removal of some of the COVID-19 restrictions.

All in all, April output rose 5.1% from the prior month to 92.78 million tons. However, it’s worth noting that this was 5.2% below April 2021’s numbers. The period from June onward will be crucial if we really want to get a sense of where Chinese iron ore and steel prices are heading.

China is Also Making Moves Regarding Supply

In the meantime, Channel News Asia reports that the Cameroonian government had inked a deal with Sinosteel Corporation Limited to mine high-grade iron ore for about US $676 million (420 billion CFA francs). It’s part of that country’s bid to find new sources of the steel-making ingredient.

Under the 20-year mining agreement, Sinosteel Cam S.A., a Cameroonian subsidiary of state-owned Chinese mining firm Sinosteel, will develop the central African nation’s Lobe iron ore mine. It’s part of China’s ongoing effort to diversify its ore supply beyond Australia, with which it is currently engaged in a trade war, and Brazil.

The deal would result in 4 million tons of ore with a 60% iron content being produced and shipped. The higher-grade iron ore would also help reduce Chinese carbon emissions from the steel-making process.

By AG Metal Miner

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