Iron ore’s drop to a five-month low adds to concerns over the strength of China’s economic recovery. We believe iron ore price risks are skewed to the downside
Iron ore has been on a downtrend for almost two months. Its price on the Singapore Exchange fell to a year-to-date low of $94.20/t last week, down more than 20% from its year-to-date highs and is now hovering below the key $100/t level.
Prices climbed above $130/t in February amid bets of a revival in steel demand in leading consumer China following the end of the strict Covid-19 lockdowns.
Although China last month reported annual quarterly GDP growth of 4.5%, ahead of expectations - and much faster than the 2.9% for Q422 - there are concerns about whether the pace of growth can be sustained. China’s manufacturing activity slowed in April, with the Purchasing Managers’ Index falling from 51.9 in March to 49.2 in April, a warning signal to the Chinese economy. This followed three straight months of growth since the start of 2023.
The growth in the construction sector, which accounts for about half of Chinese steel demand, has also been slower than anticipated. New property starts in March were down 29.1% compared with the same period the previous year.
Meanwhile, consumer inflation in China dropped close to zero in April, and its weakest pace in two years, while producer prices fell further into deflation, adding to concerns over a weak demand recovery in the country.