Economy

Iron Ore’s Slump Likely to Deepen Until China’s Economy Revives

Published

2 years ago

November 2, 2022

(Bloomberg) — Iron ore is one the poorest performing commodities this year, and the rout in prices is only likely to deepen until China’s economy stages a revival.

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.

–With assistance from Winnie Zhu.

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Economy

Liberals announce expansion to mortgage eligibility, draft rights for renters, buyers

Published

7 hours ago

September 16, 2024

Anne Joseph

OTTAWA – Finance Minister Chrystia Freeland says the government is making some changes to mortgage rules to help more Canadians to purchase their first home.

She says the changes will come into force in December and better reflect the housing market.

The price cap for insured mortgages will be boosted for the first time since 2012, moving to $1.5 million from $1 million, to allow more people to qualify for a mortgage with less than a 20 per cent down payment.

The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.

On Aug. 1 eligibility for the 30-year amortization was changed to include first-time buyers purchasing a newly-built home.

Justice Minister Arif Virani is also releasing drafts for a bill of rights for renters as well as one for homebuyers, both of which the government promised five months ago.

Virani says the government intends to work with provinces to prevent practices like renovictions, where landowners evict tenants and make minimal renovations and then seek higher rents.

The government touts today’s announced measures as the “boldest mortgage reforms in decades,” and it comes after a year of criticism over high housing costs.

The Liberals have been slumping in the polls for months, including among younger adults who say not being able to afford a house is one of their key concerns.

This report by The Canadian Press was first published Sept. 16, 2024.

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Economy

Statistics Canada says manufacturing sales up 1.4% in July at $71B

Published

8 hours ago

September 16, 2024

Anne Joseph

OTTAWA – Statistics Canada says manufacturing sales rose 1.4 per cent to $71 billion in July, helped by higher sales in the petroleum and coal and chemical product subsectors.

The increase followed a 1.7 per cent decrease in June.

The agency says sales in the petroleum and coal product subsector gained 6.7 per cent to total $8.6 billion in July as most refineries sold more, helped by higher prices and demand.

Chemical product sales rose 5.3 per cent to $5.6 billion in July, boosted by increased sales of pharmaceutical and medicine products.

Sales of wood products fell 4.8 per cent for the month to $2.9 billion, the lowest level since May 2023.

In constant dollar terms, overall manufacturing sales rose 0.9 per cent in July.

This report by The Canadian Press was first published Sept. 16, 2024.

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Economy

S&P/TSX gains almost 100 points, U.S. markets also higher ahead of rate decision

Published

3 days ago

September 13, 2024

Anne Joseph

TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.

“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.

In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.

The S&P/TSX composite index closed up 93.51 points at 23,568.65.

While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.

Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.

But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.

Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.

“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.

“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.

A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.

It would also be “counter to what they’ve signaled,” he said.

More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.

“That’s going to be more important than the size of the cut itself,” he said.

In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.

“Here, the labour situation is worse than what we see in the United States,” he said.

The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.

The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.

The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.

— With files from The Associated Press

This report by The Canadian Press was first published Sept. 13, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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