Based on media, it was set to develop into: ‘China’s Lehmann Brothers second.’
An occasion so extreme it will parallel the subprime disaster and deep world recession of 2008.
And as you may recall, I disagreed and challenged that narrative, as you possibly can see right here.
On the time, I put a lot of the negativity all the way down to the West’s biased angle towards China’s closed financial system.
So, what occurred after the deep pessimism started to fade final 12 months?
Iron ore rallied from round $100/tonne to over $130/tonne, whereas Australia’s pure-play iron ore big, Fortescue [ASX: FMG], surged greater than 40% (post-Evergrande lows).
Removed from collapsing, China’s GDP grew a formidable 5.2% in 2023; against this, the US’s grew simply 2.5%.
So, what do you have to make of this newest bearish motion?
Over the past month, an enormous deal has been revamped the dearth of latest housing begins in China’s actual property market.
As you possibly can see, new constructions (blue line) fell precipitously through the 2022 pandemic lockdowns and have didn’t get well since:
Nonetheless, regardless of weak point over the past two years, iron ore costs have been extremely resilient.
The rationale for that is likely to be the shifting demand dynamics in China’s metal market.
Whereas actual property development stays an vital driver, it’s not what it was.
All through China’s speedy progress section within the early 2000s, development (together with housing, workplace, and industrial buildings) accounted for nearly half the nation’s metal demand.
At this time, it’s lower than 1 / 4, or simply 24%.
Apparently, equipment development is now the only greatest driver; that features equipment for mining, agriculture, instruments and the hundreds of thousands of components shipped worldwide for car manufacturing.
But, in line with most China bears, metal demand and China’s actual property market go hand-in-hand.
However the actuality couldn’t be any completely different; demand drivers at the moment are way more various in comparison with the nation’s progress section from the early 2000s, as you possibly can see under:
However with that mentioned, we are able to’t ignore the carnage occurring the world over’s largest iron ore producers in 2024.
Fortescue [ASX: FMG] has fallen 25% over the past 4 weeks or virtually 40% year-to-date. In the meantime, the Brazilian iron ore big, Vale, has shed round 22%:
Regardless of actual property’s diminishing function, the inventory market continues to cost in threat.
And with Chinese language metal makers asserting output cuts final week, the state of affairs appears much more dire for Australia’s iron ore miners.
At this time, pessimism is paying homage to the Evergrande blues from 12 months in the past.
Iron ore’s spot value is now threatening to interrupt decisively under the important thing psychological barrier of $100/tonne:
Why iron ore issues for useful resource buyers
Iron ore serves as a critically vital barometer for the broader useful resource market… The canary within the coal mine should you like.
Given the deep promoting that’s taken place over the past week or extra, there’s legitimate trigger for concern.
On the floor, it’s troublesome to be optimistic… Australia’s largest mining companies have reacted severely to poor information stemming from China’s financial system.
And given steelmakers have introduced vital cutbacks in latest days, it’s simple to simply accept additional falls are on the way in which.
However it won’t be so easy.
The West holds a really superficial view of China’s financial system… The narrative is overwhelmingly bearish and normally defaults to weak point within the nation’s actual property market.
However take into account this: China holds a protracted observe document of manipulating commodity costs to its benefit. It’s laborious to criticise that technique. In the event you’re a serious purchaser, why not do all you possibly can to restrict the value you pay?
Because the world’s greatest shopper, China has the capability to control iron ore costs and fulfill longer-term targets.
And the way may it obtain that?
Given this authoritarian state’s broad attain throughout Chinese language-owned entities, together with steelmakers, it could actually simply collude with them to drive down iron ore costs each time it’s strategic to take action.
Curbing metal manufacturing is one technique. These newest bulletins on metal output cuts ‘might’ be a part of a coordinated plan by authorities and subservient metal makers to undermine the value of iron ore.
As soon as the CCP deems costs sufficiently depressed, it’d shift gears and ramp up stockpiling efforts, simply because it did all through the pandemic years.
And that was regardless of minimal demand for metal on the time.
Iron ore import knowledge stays key
Nothing occurs in China by probability, which extends to its entry to uncooked supplies… That’s why try to be observing iron ore imports rigorously.
Sturdy numbers (within the face of falling metal manufacturing) will add weight to the speculation that China is probably slicing metal manufacturing in a bid to drive down iron ore costs.
Paradoxically, that might be good for the iron ore miners over the long run. Who is aware of the place future demand will come from… Stimulus? Maybe.
However iron ore import figures would be the most helpful information in understanding the long run trajectory of China’s financial system. Way over some stats on new housing begins or metal demand.
Once more, that looks like a paradox given all of the destructive sentiment at the moment.
But, it’s exactly what a forward-looking authoritarian authorities will search to realize… Driving iron ore costs down after which stockpiling forward of future demand.
And China has each purpose to pile on stress on the iron ore market, particularly if it goals to extend stockpiles within the months forward.
If I’m proper, that limits the draw back threat for Australia’s iron ore miners. As soon as costs have sufficiently eased, China will as soon as once more develop into a prepared purchaser. However at what level might the market hit assist?
For the second, the important thing space to observe is $100/tonne.
That value held through the April lows after panic first set in following the preliminary bulletins of metal cuts amongst China’s main metal companies.
But when it fails, we might see a pointy fall to round $85/tonne, the low from October 2022. That marked peak pessimism throughout China’s pandemic lockdown.
One other key psychological stage, purple circle under:
Sure, iron ore stays at an vital juncture, however I don’t consider it’s about to fall off a cliff like many within the West concern.
— James Cooper is a geologist primarily based in Australia who runs the commodities funding service Diggers and Drillers. You may also comply with him on X @JCooperGeo.