- Bets that fresh financing for the property sector will aid demand recovery during the peak season have since unravelled, with the 100 most prominent real estate developers seeing new-home sales in September plunge by a quarter.
- That bleaker outlook will limit the upside in iron ore prices.
- The slump in China’s construction sector has also crushed global demand for bulk ships.
The beginning of China’s busiest building season was meant to increase demand for iron ore, whose prices have had a turbulent year and are currently trading close to 2022 lows. However, the recovery hasn’t materialised, leaving traders to wonder what would be the next trigger for a price increase in the essential steelmaking component as reported by Yahoo.
Problem for economy
Investors in the iron ore market, which just recorded its longest sequence of weekly losses on record, have not yet received any relief from China’s customary boom period for infrastructure projects and steel-related demand in September and October. Lockdowns caused by viruses and a severe housing collapse are still a problem for the economy.
Bets that increased funding for the real estate sector, which accounts for a third of steel consumption, could boost demand recovery during the peak season have subsequently fallen apart, with new-home sales falling by a fifth for the top 100 real estate developers in September. Financial authorities have ordered the six biggest banks in the country to provide at least 600 billion yuan ($85 billion) in net financing as they move quickly to address the liquidity problem.
Steel mills generally replenish their iron ore stockpiles before the National Day vacations at the beginning of October, but because of their deteriorating profit margins, they are only making purchases that are absolutely necessary. China’s purchasing managers’ index increased just slightly in September, at 46.6; a score below 50 denotes a contraction in the steel industry.
Tomas Gutierrez, an analyst with Kallanish Commodities, stated in email comments, “It’s definitely the worst autumn since 2015.”
“Real estate is far too big a part of the whole economy and no other sector can expand rapidly enough to make up for lost construction steel demand.”
Gutierrez was alluding to the time frame seven years prior when China’s real estate and manufacturing activity likewise experienced a significant slump. Furthermore, iron ore supplies around the world were growing quickly, and futures traded for as little as $40 per tonne.
Chinese economic expansion
The raw material for creating steel, which is essential for the building, machinery, and automotive industries, is seen as a gauge of Chinese economic expansion. According to the most current World Bank prediction, the country’s economic growth will slow to 2.8% this year, just a third of the 8.1% rate in 2021. The rise in iron ore prices will be constrained by this grimmer picture.
According to Kamal Ailani, a senior analyst at McCloskey by OPIS, which is owned by Dow Jones & Co., steel prices would be constrained because of the unfavourable economic outlook and low consumer confidence in China. In addition to the economy’s problems, the increase in China’s steel production in September has led to worries about an excess, he continued.
Certain market participants are not overly pessimistic; some analysts predict that prices will at least stabilise by the fourth quarter.
Richard Lu, a senior analyst at CRU International Ltd., stated through email that 2015 is likely to be the worst year in his years of working in the steel industry. Fortunately, we have not reached that point yet. In the last quarter of the year, CRU anticipates some improvement, with new infrastructure projects boosting steel demand.
Ailani predicts that iron ore prices will decline from their present levels in the fourth quarter, but they will remain “well supported at $85 a tonne.” According to him, below that point, medium-sized to small-sized miners could have to cut back on production due to rising costs.
By 2:12 p.m. on Tuesday, iron ore prices in Singapore had fallen 2.8% to $94.25 per tonne, while those in Dalian had been down 2.1%. Futures for hot-rolled coil and steel rebar decreased in Shanghai.
The decline in China’s building industry has also slashed demand for bulk ships worldwide. According to traders and shipbrokers, the cost of hiring a Capesize vessel for freight has decreased by approximately 80% since last October, mostly as a result of the country’s decreased need for iron ore.
For the time being, declining inventories are still giving the steel market some protection. Investors will be watching for any indications that the government would soften its stance on Covid-19 and property deleveraging as the Communist Party meeting, a twice-decade event when President Xi Jinping is anticipated to win a third term, approaches on October 16.
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