Commodity Spotlight: Iron ore slumps towards 9 month lows amid gloomy Chinese economic data

Iron Ore: Gloomy until otherwise

Singapore iron ore futures are currently pointing towards a weekly decline of -5.9% to US$103.4 a tonne.

Bearish economic data from China this week included:

• Crude steel output fell -6.4% year-on-year in July

• Demand for excavators fell -35% year-on-year in July

• Heatwave-induced energy crisis in Southwest China taking a toll on industrial production, according to Nikkei Asia

• Goldman Sachs cut its China GDP forecast from 3.3% to 3.0%, according to Bloomberg

China's comeback narrative continues to cling onto hopes that the government will unleash more generous stimulus. Earlier this week, the People's Bank of China unexpected cut its medium-term lending rate by 10 basis points to 2.75%.

Though, China's Banking and Insurance Regulatory Commission Vice Chairman Xiao Yuanqi warned that opening wide "monetary fiscal gates" will free the "caged tiger" that is inflation.

Stimulus initiatives are still being thrown around, with state media suggesting local governments could sell more than $229bn of bonds to fund infrastructure investment and budget gaps, Bloomberg reported.

Still, you'd have to see it to believe it, otherwise iron ore prices wouldn't be on the verge of dipping to levels not seen since last December.

Singapore iron ore futures (Source: TradingView)

Coal: Prices inch higher

Newcastle coal futures are currently pointing towards a weekly gain of 1.5% to US$413 a tonne.

Factors that buoyed coal prices this week include:

• In Germany, the Rhine River is at critically low levels, hampering deliveries of industrial materials, including coal. The river is forecast to become impassable for barges by week end

  • S&P Global notes that ARA coal stocks have hit a record 8.2m tonnes and German commodity trading companies warn of coal supply problems to local power plants

• China's daily coal burn rate at six major coastal power plants was 916,000 tonnes as of August 7th, according to Breakwave Advisors. This represents a week-on-week increase of 2% and year-on-year increase of 15%

  • China accounted for 53% of the world's coal consumption in 2021, according to the International Energy Agency

On a side note, BHP (ASX: BHP) posted its FY22 results this week. Its EBITDA for metallurgical coal rocketed from US$593m in FY21 to US$7.7bn in FY22.

Newcastle coal futures (Source: TradingView)

Gold: Back to selling

Gold broke above a rather longstanding downward channel in early August which gave bulls hope that maybe Treasury yields and the US dollar have finally topped. And more importantly, perhaps the yellow metal could finally start behaving by its textbook definition as both an inflation hedge and safe haven asset.

After a brief glimmer of hope, gold resumed grinding lower, now on a five day losing streak and at risk of re-entering the channel.

Source: TradingView, Annotations by Market Index

At the same time, the US Dollar Index is on a six day winning streak.

Central banks continue to aggressively hike interest rates, with Philippines and Norway both seeing a 50 bps rate hike on Thursday, pressuring the non-interest bearing gold.

The Fed minutes on Thursday was rather mixed, with members acknowledging a "risk that the Committee could tighten the stance of policy by more than necessary to restore price stability."

But reiterated that "with inflation remaining well above the committee’s objective, participants judged that moving to a restrictive stance of policy was required to meet the committee’s legislative mandate to promote maximum employment and price stability.”

US Dollar Index (Source: TradingView)