Iron ore prices, in particular spot prices, are falling sharply at the moment.
As per Business Insider:
‘The spot price for benchmark 62% fines slumped 2.5% to $72.18 a tonne, adding to the declines seen in the prior two sessions.58% fines tumbled 2.9% to $43.47 a tonne, its largest one-day percentage decline since August 21.
‘65% Brazilian fines fell by a slightly smaller 2.1% to $90.70 a tonne, extending its drop from late October to over 8%. The price of 58% fines now sits at a one-month low. For 65% fines, it’s a five-month low.’
A number of factors at play in iron ore prices
In a previous post we covered how a key indicator, namely shipping costs, has been falling rapidly so this latest price movement does not come as much of a surprise.
More recently, there has been the announcement of a ‘second-level’ smog alert in 10 cities effective from 22 November, prompting a reduction in steel output.
Previously, an ‘orange alert’ in Tangshan, China’s top steel producing city, triggered a brief dip in late October.
With more widespread winter curbs in production potentially around the corner, the immediate outlook for iron ore prices is starting to appear more negative.
That being said, there is the possibility that once iron ore prices come out of their winter hibernation, Chinese growth could still be sluggish.
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A couple recent intriguing pieces out of the South China Morning Post, have hinted that China might ramp up its stimulus in the coming months.
Especially if the trade war worsens.
As PineBridge chief economist, Markus Schomer said:
‘If the Trump administration goes on and escalates further, we’ll probably get to the point where China’s leaders abandoned deleveraging and have to go all out to avoid a much more serious slowdown in the economy.’
Infrastructure spending has experienced a 7% uptick following a range of mid-strength stimulus measures China has implemented in the past 3–4 months, leading to a strongly performing iron ore price.
As a result another commentator in the same publication also notes:
‘The durability of this external buoyancy is questionable. With trade tariffs starting to bite, stiffening headwinds for Chinese exports are expected in the coming months.’
Analysis points to earlier iron ore price band being appropriate
What to make of all of this?
A couple things.
First, if the winter curbs hit hard, it is possible that iron ore prices will briefly dip below the band we proposed last week.
Second, once this happens, in the January–March range the Chinese government may step in to spur growth if the trade war is unresolved.
This could lead to the price of iron ore sitting in the proposed band once more.
With plenty to digest, investors in the sector will be following the G20 meeting between Donald Trump and Xi Jinping very closely.