March 19, 2020 / 10:47 AM / 12 days ago

Column: Are resilient iron ore, steel and coking coal having a Wile E. Coyote moment?

LAUNCESTON, Australia (Reuters) - China’s iron ore and steel markets appear to be taking a risky bet that Beijing’s yet-to-be-announced stimulus measures will be enough to offset a looming global recession as the coronavirus spreads across the world.

Cranes unload imported iron ore from a cargo vessel at a port in Lianyungang, Jiangsu province, China October 27, 2019. REUTERS/Stringer

But there is an increasing risk that they may be having a Wile E. Coyote moment, the one where the hapless Road Runner-chasing cartoon coyote goes over the edge of a cliff and hangs in midair until he realises he is about to plummet into a deep canyon.

Iron ore, Shanghai steel futures and Australian coking coal have up until now been sharing something that is increasingly at odds with virtually every other commodity, namely that their prices have held up in the face of mounting economic gloom.

Benchmark 62% iron ore for delivery to China, as assessed by commodity price reporting agency Argus, ended at $90.15 a tonne on Wednesday, down slightly from the previous close of $90.40.

The steel-making ingredient is little changed on a year-to-date basis, having lost just 1.1% so far in 2020. It’s also well above the low of $79.85 a tonne, hit on Feb. 3 just as the Chinese economy was being largely shut down to stop the spread of the coronavirus from its epicentre in the city of Wuhan.

However, the recent resilience shown by Dalian Commodity Exchange iron ore futures may have started to crack, with steep intraday falls on Thursday.

In the Asian afternoon on Thursday, the contract was around 652 yuan ($92.22) a tonne, down from the previous close of 665 yuan. However, it was still up for the year and up 14.5% from this year’s low of 569.5 yuan on Feb. 4.

It’s not just iron ore that has been resilient in the face of the coronavirus, with coking coal, the high-quality fuel used in blast furnaces to make steel, gaining significantly.

The Singapore Exchange’s Australian coking coal futures ended at $161.84 a tonne on Wednesday, up 19% from the end of last year.

Some of the price strength in iron ore and coking coal is likely related to some supply tightness, given weather related disruptions to shipments in Australia, the top exporter of both commodities, and also in Brazil, the second-biggest iron ore supplier.

But these supply issues are largely resolved and prices have remained resilient, supporting the view of genuine optimism in the sector, something also reflected in the price of steel.

Shanghai steel futures were losing ground in Asian trade on Thursday, but at around 3,437 yuan a tonne, they were still some 5.5% above the low so far this year on Feb. 3, although they are down 3.4% from the end of last year.

HOPE TRUMPS REALITY?

The recent price action for iron ore, coal and steel looks somewhat out of step with the inevitable hit to both Chinese and global economic growth from the coronavirus.

It appears the sector has been trading largely on sentiment, given some woeful economic data in China, with industrial production down 13.5% in the first two months of the year compared to the same period in 2019, and private sector investment plunging 26.4%.

There is a widespread market expectation that Beijing will do more to stimulate the economy as it recovers after the coronavirus shutdown, although no major plans have yet been announced.

So far the authorities have loosened reserve requirements for banks and taken other steps to ensure credit and money markets are liquid.

But iron ore, steel and coking coal are pricing on the basis that a massive infrastructure and construction programme is coming, maybe even bigger than the 4 trillion yuan ($566 billion) package announced in the wake of 2008 global financial crisis.

While some sort of stimulus is almost certain, the risk is that it falls short of the current market optimism.

Then there is also the likely deleterious impact on the world’s second-largest economy as the developed countries of Europe and North America increasingly go into coronavirus lockdowns, which will smash demand for Chinese manufactured goods.

How long the iron ore, steel and coking coal markets can keep up their optimism remains to be seen.

The opinions expressed here are those of the author, a columnist for Reuters. 

Editing by Richard Pullin

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