September 17, 2019 / 9:34 AM / a month ago

Column: China steel, iron ore sectors bet on stimulus hopes over economic reality

LAUNCESTON, Australia (Reuters) - Is it time to challenge the conventional wisdom in iron ore and steel markets that poor Chinese economic data is actually good news because it means Beijing will ramp up stimulus spending, thereby boosting demand?

Workers are seen by a freight train at the iron ore terminal at Dalian Port, Liaoning province, China September 21, 2018. REUTERS/Muyu Xu

The current thinking of ‘bad data equals good news’ was on display this week, with steel prices rallying after economic news showed a deepening slowdown in China’s factory and consumer sectors.

Benchmark Shanghai steel rebar futures gained as much as 2.1% in Monday’s trade to 3,575 yuan ($505.71) a tonne, the highest in six weeks, before ending 1.5% higher at 3,553 yuan.

The increase in steel came as industrial production grew at the weakest pace in 17-1/2 years, climbing just 4.4% year-on-year in August, down from 4.8% in July and below the median forecast of analysts polled by Reuters for 5.2% growth.

Fixed-asset investment for the first eight months of the year rose by 5.5%, below the 5.6% rate forecast by analysts.

Retail sales growth also disappointed at 7.5% in August, down from July’s 7.6%, with the drop underlining the notion that China’s economy is losing momentum amid the protracted trade dispute with the United States.

Since the global recession of 2008, market participants have come to expect that Beijing will simply open up the stimulus taps when confronted with evidence of slowing growth, given the political and social imperative to keep the world’s second-largest economy humming along at an annual growth pace of at least 6%.

However, Chinese Premier Li Keqiang said, it is “very difficult” for the economy to keep up a growth rate of 6%, citing the “complicated international situation” and the increasingly high base from which this expansion has to occur.

China faces “certain downward pressure” from slowing global growth and a rise in protectionism and unilateralism, Li said in an interview published on Monday on the government’s website.

STIMULUS HOPES VS. ECONOMIC REALITIES

The official acknowledgement that China’s economy is facing headwinds is likely to fuel expectations of further stimulus, over and above measures already taken, such as reducing the reserve requirements of banks three times so far this year.

Effectively, what steel and iron ore market participants are betting on is that the expectation of China stimulus spending will outweigh the reality of slowing economic growth.

Whether they are placing the correct bet may be answered soon enough, as the upcoming China National Day holidays in the first week in October may provide a suitable stage for government announcements on new efforts to turbocharge economic growth.

In the meantime, it appears hope is trumping reality, with iron ore prices and imports looking robust.

Spot 62% iron ore, as assessed by commodity price reporting agency Argus, ended at $97.55 a tonne on Monday, just below the prior close of $99.20, which was the highest in five weeks.

The iron ore price has rallied 19.7% since hitting an eight-month low of $81.50 a tonne on Aug. 29, amid both some optimism that Beijing and Washington will resume trade talks and expectations for increased Chinese stimulus.

Iron ore imports are also recovering from mine closures in Brazil in the wake of a fatal tailings dam disaster in January and a tropical cyclone in Australia in late March.

Official data showed imports of the steelmaking ingredient at 94.85 million tonnes in August, a 19-month high.

August’s figure could well be exceeded in September, with Refinitiv vessel-tracking and port data estimating imports may reach more than 100 million tonnes, although this figure is likely to be revised as the end of the month approaches.

Nonetheless, the strength in iron ore prices and imports, as well as those for steel are indicative of a sector that expects better times ahead.

Pollution cutbacks in steel-producing regions may also act to support steel prices and margins, which have recovered somewhat in recent weeks, leading to a recovery in production in August.

The pollution control measures may also result in mills shifting to higher-grade iron ore in a bid to maximise the amount of steel produced for each tonne of the raw material.

Overall, for a bullish view of the steel and iron ore sectors to be justified, it will need broad-based stimulus that supports all the major pillars of steel demand: residential building construction, infrastructure projects and manufacturing such as automobiles and white goods.

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

Editing by Kenneth Maxwell

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