Futures in Singapore have fallen for seven straight months, the
worst run since the contract debuted in 2013. At around $81 a ton, the mineral
costs about a third of its peak in May last year.
China is by far the biggest buyer of iron ore, mainly from Australia
and Brazil, to feed annual steel production that has topped 1 billion tons in
the last two years. As such, it’s one of the defining raw materials of China’s
economy, and a stalwart of a commodities boom that risks becoming a distant
memory as the property market teeters and Beijing persists with its
growth-crippling virus controls.
Hopes that conditions would improve in the autumn, the peak
season for Chinese construction activity, were dashed by the end of the
Communist Party Congress in October. The twice-a-decade meeting failed to
deliver large-scale support for the real-estate sector, and didn’t chart a path
out of the thicket of Covid Zero rules that have hobbled demand across
commodities and disrupted operations from malls to factories and building
sites.
“There is probably more downside ahead, as there is no clarity
yet around the end of Covid lockdowns and no clear outline of economic measures
to boost China’s economy,” said Gavin Wendt, founding director of Sydney-based
MineLife Pty. That means tough times and margin pressures at steel mills are
likely to continue, he said.
China’s steel industry has been warning of a crisis since the
summer, and the third quarter saw major mills turn in their first aggregate
loss since at least 2018, when Bloomberg began compiling data. They’ve tempered
their purchases of iron ore in response.
Slowing global growth leaves little opportunity for steel mills
to export their way out of trouble. Anti-pollution curbs on operations over the
winter, and a government cap on annual steel output to limit carbon emissions,
complete a bleak picture for demand over the next few months.
UBS AG estimates that daily steel production in China will fall
by about 5% this quarter versus the September rate if the authorities enforce their
target of lower annual production in 2022.
China’s property market accounts for 39% of its steel
consumption, according to Gavekal Dragonomics. That sector has been in steep
decline for over a year after Beijing stepped in to deflate what it feared was
a bubble.
The situation isn’t getting any better, with sales at the top
100 developers plunging 28% last month. While government infrastructure
spending to support the economy has offset some of the losses for steelmakers,
the industry remains mired in contraction along with China’s broader
manufacturing base, according to the latest survey of purchasing managers.
Iron ore’s steep drop contrasts with other metals used in
construction, like copper and aluminum, which benefit from additional demand
keyed to the energy transition away from fossil fuels. They’re also prone to
supply squeezes. Copper has suffered from a lag in mining investment, while
power shortages caused by heatwaves and the war in Ukraine have propped up
aluminum.
Iron ore is a case apart. The big miners have been tremendously
successful in lopping off costs in recent years and are under no great pressure
to stem supply. Rio Tinto Group’s cost of production in the Pilbara, for
example, is about $20 a ton, and its laser-like focus on efficiency meant it
was still able to make money when iron ore futures hit a record low of $36 a
ton in 2015.
Without any major reversals in Chinese policy, the expectation
is that prices are likely to weaken from here. The latest forecasts from
Citigroup Inc. and Goldman Sachs Group Inc. call for a drop to $70 a ton in
three months.
Iron ore declined 0.3% to $80.30 a ton in Singapore as of 10:19
a.m. local time. Copper slipped 0.1% to $7,616 a ton on the London Metal
Exchange, down for the fifth time in six sessions after the Federal Reserve’s
hint it will raise rates higher-than-expected in coming months sapped risk
appetite. Aluminum rose 0.8% to $2,268 a ton to be up for a fourth day.
Unverified social media posts earlier this week that suggested
the government will assess how to exit Covid Zero have helped rally prices a
little. Still, many remain skeptical that President Xi Jinping’s signature
policy can easily be rolled back in just a few months, and if anything the
excitement indicates a market that hinges almost entirely on what’s next from
Beijing.