Iron ore caught up in a Chinese tug-of-war: October imports, lockdowns and stimulus

Iron ore is stuck between a Chinese tug-of-war as their rising covid cases offset ongoing stimulus measures seeking to pump life back into rather dire economic circumstances. 

This back and forth has been reflected in the price action of both iron ore spot price and miners. Both having bounced strongly off November lows and, at least for now, refusing to give back those gains.

Majors BHP (ASX: BHP) and Rio Tinto (ASX: RIO) are down around -1.0% in afternoon trade on Monday. While Fortescue (ASX: FMG) is sitting just above breakeven.

Singapore iron ore futures have remained steady at the low US$90 a tonne mark, up 17.5% from October lows. Year-to-date, prices are still down -23.6%. 

October: Numbers still down

Iron ore stats from China for October were rather mixed, according to Breakwave Advisors. Some notable highlights include:

• China imported 94.97 million tonnes of iron ore in October, down approximately -4.7% year-on-year

• China imported 917.0 million tonnes of iron ore for the year-to-October, down -1.7% compared to the prior period

• “Chinese steel mills stepped up utilisation rates during October expecting demand to pick up and government stimulus measures to boost activity.”

• Domestic iron ore production was 72.68m tonnes in October, down -10.7% year-on-year

People’s Bank of China: Cutting rates

China’s central bank cut the amount of cash that banks must hold in reserve by 25 bps to 7.8% from 5 December and inject approximately 500bn yuan (US$70bn) in long-term liquidity. 

Still, analysts view the reserve rate cut as only effective when there's demand for loans. Otherwise, it's a rather ineffective tool of bolstering the economy.

“Reserve rate ratio cuts don’t magically create growth, they free up reserves so banks can lend more. If loan demand is poor, reserve ratio cuts do little. While this probably does mean more lending spills into property, this is a marginal way of supporting the sector,” said China Beige Book. 

Daily cases: Still searching for a peak

China’s daily covid case count continues to gather momentum, setting a fourth straight daily record of 39,791 new cases last Saturday, according to Reuters.

Lockdowns and restrictions in big cities are ramping up relative to the nationwide level, according to Steno Research.

Source: Steno Research

What to look out for

• Protests are escalating across China, with some comparing these to the likes of the 1989 Tiananmen protests. This places President Xi at a key inflection point: ease lockdowns or crack down.

• China reports its NBS manufacturing and services purchasing manufacturing figures on 30 November. Both figures were in contraction for October, at 49.2 and 48.7 respectively. Do we see the figures further contract in November?

• China is stepping up support for its real estate sector, with recent headlines such as the Bank of China pledging US$179 to builders, according to Bloomberg. Will more money roll out to save the property sector?