Column: China’s recovery and supply concerns are causing iron ore to soar

The logo of Australian group Fortescue Metals (FMG) can be seen on a bulk carrier loaded with iron ore in the coastal town of Port Hedland, Western Australia November 29, 2018. Picture taken November 29, 2018. REUTERS/Melanie Burton

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LAUNCESTON, Australia, May 23 (Reuters) – Iron ore prices have applauded China’s decision to cut its benchmark mortgage interest rate by a surprisingly wide margin, and several factors suggest a a new recovery is in sight.

Spot 62% iron ore for delivery in northern China, as valued by commodity pricing agency Argus, jumped to $135.90 a tonne on May 20, up from 5.7% from the previous day and the strongest close since May 6.

Domestic iron ore futures on the Dalian Commodity Exchange were also stronger, rising 3.4% more modestly to end at 827 yuan ($123.62) a ton on May 20.

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China cut the five-year prime lending rate by 15 basis points to 4.45% at the May 20 monthly setting, the biggest cut since the interest rate mechanism was overhauled in 2019 and more than the five or 10 basis points tipped by most in a Reuters poll. Read more

The move was seen by analysts as an attempt to boost the real estate and construction sectors, which account for around 25% of the economy and have struggled in recent months under the strict zero- Beijing’s COVID, which has led to prolonged shutdowns in several cities. including the main financial center of Shanghai.

Chinese Premier Li Keqiang said last week that Beijing would step up policy adjustments to return the world’s second-largest economy to what he described as normal growth.

The market’s interpretation of Li’s comments was that more stimulus is likely, with hopes that manufacturing will also get a boost.

Coupled with signs that Shanghai is beginning to emerge from its strict lockdown, the view is that the Chinese economy should rebound in the second half.

All of these measures bode well for iron ore demand and steel production, and other factors suggest that iron ore still has room to recover.

The first is that supply from major exporters, Australia and Brazil, appears to be at levels below potential.

The main shipper, Australia, is on track to export around 72.45 million tonnes in May, according to commodity analysts Kpler, down slightly from 73.48 million in April.

It’s a similar story for the second-largest exporter, Brazil, with May exports likely slightly weaker than the previous month, at 24.82 million tonnes, down slightly from April’s 25.42 million.

UKRAINE OUT

Iron ore shipments from Ukraine, which used to supply around 44 million tonnes a year to the seaborne market, mostly to European buyers, are still a concern.

Ukraine was the fourth largest exporter of iron ore, but Kpler data shows shipments fell to zero from March, after 2.32 million tonnes were exported in February.

Another small iron ore exporter, India, is also set to see its shipments plummet, with Argus reporting on Monday that the government has imposed a 50% tax on exports of all grades.

This would effectively make India’s exports uncompetitive and would likely drop to zero. The South Asian nation shipped 3.14 million tonnes in April, according to Kpler.

Another factor is iron ore inventories in Chinese ports, which have fallen in recent weeks, although they are still at higher levels than they were at the same time in 2021 and 2020.

Stocks rose to 137.25 million tonnes in the week to May 20, from a peak of 160.95 million in 2022 on February 18, but still above the 128.35 million of the same weeks in 2021 and 110 million in 2020.

In some ways, it’s not the absolute level of inventory that’s critical, it’s the rate at which it’s declining, and the 15% drop from February’s peak indicates a fairly rapid drawdown on available inventory and potential replenishment demand.

There are also signs that China is increasing its steel production after winter pollution control measures were scrapped and some COVID-19 restrictions were lifted.

April production rose 5.1% from the previous month to 92.78 million tonnes, although it was also still 5.2% below the April 2021 level.

This shows that there is still room to further increase steel production, and it is also a quick way to stimulate the economy, because even if the steel produced is not needed immediately, it is easy to store it for future use.

Overall, the picture emerging is that long-awaited Chinese stimulus measures are starting to materialize, COVID-19 is potentially being pushed back, and the government wants a return to solid growth in the second half of the year. All positive for iron ore.

The opinions expressed here are those of the author, columnist for Reuters.

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Editing by Muralikumar Anantharaman

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust.