China boom turbocharges iron ore

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Iron ore prices rallied to a two-month high as robust demand from Chinese steel mills eats into stockpiles despite Australia’s big three miners shipping in supply at a record pace.

The rally in Australia’s largest export saw BHP, Rio Tinto and Fortescue Metals Group lift the local sharemarket to a nine-month high on Monday, while the Australian dollar closed in on its highs for the year.

The iron ore price climbed to $US128.83 a tonne on Friday, it’s highest level since September 14 when it was topped $US130 a tonne, as suppliers rush to keep up with demand. China’s is producing more than 90 million tonnes of steel a month.

BHP Group rose 2.5 per cent to $37.05, Rio Tinto advanced 1.5 per cent to $100.89 and Fortescue Metals Group climbed 3.9 per cent to $17.61.

“We’ve seen China’s steel demand comfortably at all-time highs for some months now,” said NAB head of commodities research Lachlan Shaw.

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“[But] what was missing was really that strong steel pricing, and that was because steel inventory was high. In the last month, that’s fallen briskly.”

The strong performance of the local miners pushed the S&P/ASX 200 Index up 22.4 points, or 0.34 per cent, to 6561.6, its highest level since February 27.

Chinese demand for raw materials is offsetting concerns over heightened tensions between Australia and its major trading partner that has flared up in the form of tariffs on wine and lobsters, and statements in the Chinese media.

“The Chinese economy has bounced back strongly from their pandemic and it’s leading the way for the global community,” according to Ross MacMillan, senior research analyst at Morningstar.

“That’s good news for the miners and the Australian economy.”

A higher sustained iron ore price would be welcomed by the government and could add about $22.9 billion more to nominal GDP than initially forecast at an assumed price of $US55.

Pandemic winners

China, Mr Shaw said, was stockpiling iron ore. “That’s normally a bearish indicator, but when you look at that inventory in days-of-use terms, it’s actually still comfortably below the long-term average,” he said.

“Australia has been shipping effectively at record run rates. It’s been that demand story which has kept the steel market supported and then the iron ore market really well supported, too.”

Emerging from the COVID-19 pandemic, China has invested heavily into the economy, pouring money into the steel-intensive infrastructure and property sectors.

“The construction periods for those projects is at least a year or two, so my expectation is we’ll see elevated levels of construction well into next year,” said Mr Shaw.

Brazil disruptions

MST Marquee’s Hasan Tevfik said he expected demand growth for iron ore to stabilise and slow down.

“That would be consistent with weaker credit growth and the Chinese government’s own plan for 5 per cent GDP growth,” he said.

“However, supply issues coming out of Brazil seem to be supporting the price for now.”

As China enters winter, production is set to slow; however, demand has remained robust due to a warmer-than-usual autumn.

“[It] means construction in the north has continued later than it has normally, which has kept the market pretty healthy,” said Mr Shaw.

“If demand holds up strongly through winter, and you couple that with a slowdown in seasonal supply, resulting in less iron ore coming out of Brazil, and you combine that with reasonably strong demand coming out of China, you could see the price well supported for the next six months.”

Even if China’s appetite for steel begins to wane, the massive level of stimulus expected from Europe and the US as they emerge from the pandemic should see them take the reins.

“Moving into next year, it’s the case you’ll see stronger steel production growth outside China, and that will help to offset any slowing in China’s production growth,” Mr Shaw said.

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