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Commodity spotlight: Iron ore falls on dire steel PMIs

Fri 01 Jul 22, 3:34pm (AEST)
Copper 9 Mining
Source: iStock

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Key Points

  • Iron ore prices slide on Friday as Chinese steel PMIs hit 14 year lows
  • Copper prices on a 4-week losing streak, down to 17-month lows
  • European aluminium smelters are unprofitable amid surging energy prices

Iron ore: Dire steel PMIs

Iron ore rallied earlier this week, supported by the easing of covid quarantine restrictions in China. Chinese authorities reduced the quarantine period for inbound travellers from 14 to 7 days.

But it all went downhill from there. 

On Tuesday, President Xi Jinping reiterated his ‘zero-tolerance’ stance on covid outbreaks, saying it was better to forgo “a little economic growth” than “harm people’s health”. 

On the economic data front, China's manufacturing and services PMIs rebounded in June after shrinking for three consecutive months.

China Caixin Manufacturing PMI - June 2022 Data - 2011-2021 Historical - July Fo
China Caixin Manufacturing PMIs, a reading of 50 separates expansion from contraction (Source: TradingEconomics)

Though, it was widely expected that PMIs would return to positive territory as Shanghai and Beijing began to exit lockdowns.

The base of China's economic restoration was far from strong, according to Caixin Global. The reporting agency flagged deteriorating household income and expectations caused by a weak labour market, which dampened the demand recovery.

Alarmingly, PMIs for the Chinese steel sector fell to 36.2, the lowest level since the 2008 Global Financial Crisis. This is the likely catalyst behind the -4.7% decline in Chinese iron ore futures today.

2022-07-01 15 17 45-Iron Ore
Chinese iron ore futures (Source: Dalian Commodity Exchange)

Copper: Getting uglier by the week

The economic bellwether is showing no signs of improvement, down for a fourth straight week to a fresh 17-month low.

Copper's downtrend was unchanged in the face of improving Chinese PMIs and easing restrictions, which suggests the market is placing greater emphasis on a potential economic slowdown.

Last week, copper was down -20% in 10 trading days, the largest 10-day decline since 2020, according to Bespoke.

FWBOe1-XEAARYcx
Source: Bespoke

Aluminium: Europe can't afford to produce

Aluminium production is energy intensive, requiring approximately 15-17MWh of electricity to produce a tonne.

Electricity prices in Europe vary between 20 to 400 euros per MWh, according to European power exchange, epexspot.

At a price of 200 euros per MWh, this assumes a tonne of aluminium is costing at least 3,000 euros. While current spot prices sit at just US$2,445.

Market Data EPEX SPOT
Source: epexspot

Higher power prices are squeezing the margins of European smelters and weakening aluminium prices.

“I think it will be a matter of if, not when, we see more smelter cuts for aluminium. It isn’t sustainable for some production to continue,” a second European trader told Fastmarkets.

China on the other hand, produced a record 3.42m tonnes of aluminium in May as an abundance of hydropower helped offset elevated power costs.

2022-07-01 15 22 50-Aluminum - 2022 Data - 1989-2021 Historical - 2023 Forecast - Price - Quote - Ch
Source: TradingEconomics

 

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Written By

Kerry Sun

Finance Writer & Social Media

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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