China steps up stimulus: BHP, Rio Tinto and Fortescue near 2-month highs

China is beginning to ramp up stimulus efforts to boost its underwhelming post-Covid recovery, which included an unexpected interest rate cut on Tuesday.

The People’s Bank of China cut its seven-day reverse repo rate – used to manage short-term liquidity in the banking system – from 2.0% to 1.9%. On the same day, economic data including loan growth and M2 money supply both came in below analyst expectations.

Iron ore prices have bounced strongly from late-May lows of US$94 a tonne amid growing expectations of more stimulus from the Chinese government. On Wednesday, Singapore iron ore futures were fetching US$111.90 a tonne in early trade. 

Iron ore futures chart (Source: TradingView)

This has also drawn a strong response from ASX-listed iron ore stocks, with BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue (ASX: FMG) shares – All of which are up around 2.5% in early trade.

BHP (Orange), Rio Tinto (Green) and Fortescue (Blue) vs. Iron ore (Source: TradingView)

A closer look at China’s recent data points

China posted 1.36 trillion yuan in new loans in May, well-below consensus expectations of 1.60 trillion yuan. While M2 money supply fell 11.6% year-on-year to the lowest level since July 2022, driven by a decline in corporate deposits.

“This set of credit data is the latest in a series of weak data, and stimulus seems clearly underway,” Citi said in a note on Tuesday.

“We have already received weak PMIs, exports and still close-to-zero inflation numbers for May. The high-frequency numbers also showed softening sequential momentum, especially for the property sector.”

Last week, China’s producer prices fell further in May, down 4.6% year-on-year from -4.3% in April and below analyst expectations of -4.3%. This marked the steepest year-on-year drop in seven years, reflecting softening commodity prices and weak demand. 

“More easing actions especially those of low threshold could follow, but for significant moves, we may still need to wait until the July Politburo meeting,” the analysts said.

The state of play for iron ore miners 

Macquarie has observed some stabilisation in Chinese iron ore data points but flagged no signs of restocking just yet.

“The daily iron ore offtake from 45 major ports in China increased by 2.3% week-on-week, which resulted in a mild decline of iron ore stocks last week. We note spot iron-ore transactions improved last week, implying improved market buying and better iron-ore price support,” the analysts said in a note on Tuesday.

“Spot iron-ore prices are trading below our short-term price forecasts which present earnings headwinds for iron-ore miners; however, upside remains for the medium to longer term.”

As far as preferred picks, Macquarie maintained its preference for BHP as it “boasts stronger organic growth options”. The broker had a positive view on Mineral Resources (ASX: MIN), with expectations that the strong outlook for lithium will outweigh iron ore-related headwinds.

Other notable picks include Deterra Royalties (ASX: DRR) for its “low volatility exposure to iron ore” as well as Champion Iron (ASX: CIA) for “high-grade exposure via Bloom Lake and Direct Reduction Pellet Feed.”