By Macro Hive
Commodities Insights (SGX Iron Ore)
- Iron ore is now trading below $90 after China’s Party Congress meetings.
- The thrust of policy announcements suggests further stimulus and aid for the property sector will be incremental rather than robust, likely keeping downward pressure on iron ore prices.
China Growth Tracker
- Our China Growth Tracker is set on a downward trajectory as Covid-19 remains rampant and the Party Congress proves unfruitful for markets.
- With no boost from the Party Congress, we see iron ore prices trending even lower. We turn short iron ore.
Party Congress Appears to Signal Further Iron Ore Weakness
Since mid-September, iron ore prices have dropped from $100 to a close of $88.79 on 25 October in a jagged but decidedly downward trend (Chart 1). Much of the decline was due to soft steel production in the 30mn metric ton (MT) range, with steelmakers drawing down high inventories (Chart 2). This pattern has probably continued into October, with little sign of the usual seasonal pickup in iron ore demand and steel production due to the ongoing property crisis.
Imports have been running at about 14mn MT per week, a typical level. Yet inventories are relatively low, suggesting underlying support for iron ore prices and any further price decline may be gradual.
On the other hand, away from China, Brazilian mining giant Vale SA said its 3Q output was 89.7mn (MT) of iron ore,2.8% higher than forecast. Sales only totalled 69mn MT, boosting inventories. Rio Tinto projected iron ore shipments could be at the low end of their forecast – but more due to a shortage of skilled labour than soft demand. Supply could continue to exert downward pressure.
But the key factor may be policy going forward. Hopes the recent National Congress of the Communist Party would soon bring relief on the zero-Covid policy or significant support for the property sector went unfulfilled. President Xi Jinping emphasized his priorities ahead are security, ideology and redistributing wealth, with economic growth secondary.
How this rhetoric translates into policy actions remains to be seen. But markets took Xi at his word, with Chinese equity indices and tech companies selling off sharply. At the least, we expect further stimulus and support for the property sector will be measured rather than heavy.
We expect further downward pressure on iron ore prices in coming weeks and months.
Macro Hiveresearch for SGX has found that iron ore, along with several other commodity and bond markets, tracks Chinese growth closely. Therefore, these markets can indicate future reported Chinese growth. And divergences across them can be exploited. Here are their latest developments:
- Our China Growth Tracker continued to trend lower as Covid-19 cases keep rising and the Party Congress proves unfruitful (Chart 3). This is despite Q3 GDP pointing to faster-than-expected growth, against market expectations.
- The outcome of the Party Congress has disappointed the market. Even more Xi loyalists were appointed to the Standing Committee and Politburo than expected. Meanwhile, with Liu He and Li Keqiang retiring, the top decision-making circle appears to lack candidates with the same reform and economic pedigrees. In this context, the ‘China is un-investable’ theme may keep reappearing.
- Meanwhile, China’s zero-Covid policy has now become an exclusively medical question, meaning politics and economics will be irrelevant in the debate. The weeks ahead may see quarantining for inbound travellers reduced, but not scrapped, which would improve travel plans for students and business travellers. The earliest point for a broad relaxation of the zero-Covid policy would likely be spring, but this is uncertain.
- Turning to our tracker, over the past two weeks, annual growth for three of five tracker components weakened (copper: -5pp; oil: -8pp; China 10Y yield: -5.5bps; Charts 4, 5, and 6). Spot changes paint a weaker picture, with all components, except copper, depreciating over the past weeks (Chart 6).
- With no boost from the Party Congress, we see iron ore prices trending even lower. We turn short iron ore.
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