Chinese Demand for Iron Ore Is Pushing the Price Higher
The outbreak in China was meant to hurt Aussie iron ore companies.
China was crippled. Or at least it looked so from the outside.
The virus wasn’t so bad, they said.
Turned out the lack of accurate information from the Chinese Communist Party (CCP) meant that the Aussie government had very little information to make decisions on.
The worst case was a generation of people being wiped out.
That was not a cost the Aussie government wanted on their hands.
So, they shuttered off indoors, and the Aussie economy closed with it…
Two months ago, when confusion reigned and the headlines were predicting the worst, companies doing business with China were meant to be the ones that suffered the most.
Meaning our diggers of red dirt were meant to see their share prices tank.
Yet as I pointed out on Tuesday, our trio of iron ore leaders are flying.
Almost nothing appears to stop their run.
The question is, how much longer will it last?
Well, that all depends on just how much more iron ore China wants to buy…
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Iron ore trio continues to rise
The share prices of Rio Tinto, BHP, and Fortescue Metals continue to defy gravity.
Despite the absence of global demand for steel, Chinese demand for iron ore is pushing the price higher.
So, what gives? How are these stocks so untouchable when their biggest customer was the cause of the world’s woes right now?
Part of their luck comes from the fact a major supplier of iron ore in Brazil, the Córrego do Feijão mine owned by Vale SA [NYSE:VALE], has had numerous false starts of trying to get back online after the dam tailings collapse last year.
Now it appears the coronavirus is affecting staff. Meaning production is at best two-thirds of what it should be.
But more importantly, how is it that China is demanding iron ore from the rest of the world, when the rest of the world isn’t buying the finished product?
One thing to remember, is that stockpiles of iron ore tend to dip over January. It’s the tail end of winter in China, as well as the month of the major national holiday, the Lunar New Year.
So, it’s normal to see a pick up in iron ore imports in the country in February.
Of course, that pick up didn’t happen then because of the virus. Which means the pick up in iron ore began in April this year. And that’s when the iron ore price really started to run…
In February the Australian Financial Review said that steel stockpiles were sitting at ‘worrying highs’.
More to the point, iron ore stockpiles are at 12-month lows, but the finished products are at 12-month highs.
To boot, as the iron ore price climbs, the margins for local steel suppliers get thinner by the day.
Chinese Steel Mill Profitability
Source: Metals Market Index
Although profits aren’t a major concern for the CCP, they never have been. It’s a ‘produce first, profits second’ mentality when it comes to driving the business.
The problem with all of this is that export orders are almost absent.
Exports of finished steel are down. Orders are being cancelled at the factories producing them.
Global demand is for steel is weak.
Yet Chinese companies continue to buy more and produce steel with no one to ship them to.
Why stockpile all that steel?
Banking on a fat cheque
The ‘two sessions’ were held in China last week. That’s where the leaders of the country outlay their vision of how they will target economic growth. There are some interesting titbits from this we’ll dive into next week…
But for today, the CCP made it clear that ‘internal’ growth was the most important thing.
That is, people working and people buying things.
So, the continued stockpiling of steel is most likely part of the fact that it has people working.
And while they didn’t outright state that there will be money set aside for infrastructure, there was some talk about how local governments will be able to spend on certain projects of their choice.
However, the rampant production of steel without a buyer suggests two things: If you build it, they will come.
That is, by having the products on hand, global orders will eventually pick up because the country was the only one that managed to produce the stuff while we suffered through the effects of the virus.
Or, looking at other data, it could be that there will be local infrastructure projects, and we just don’t know it yet.
In the month of May, heavy truck sales increased 62% compared to May 2019.
The kind of heavy trucks you’d find on a mine site…or on infrastructure projects.
While the free yuan the CCP is throwing out might not be out to replicate the kind of easy money of 2008, internal moves of products mean that there is a preparation of some sort of industrial pursuit.
The question from here is, what are the odds Aussie miners will reap the benefits this time around?
Until next time,