Iron ore prices rally after China returns from a week long holiday

Chinese iron ore futures rallied 2.55% to a 2-month high in early trade on Monday as buying activity returned after the week-long National Day holiday from 1-7 October.

The renewed strength behind iron ire buoys the performance of local iron ore majors BHP (ASX: BHP) and Rio Tinto (ASX: RIO), both of which are trading around flat in afternoon trade. While Fortescue (ASX: FMG) is catching a bid, up 2.1%.

The Materials sector has held up relatively well compared to the rest of the market following a stronger-than-expected US jobs data that fuelled expectations of more outsized interest rate hikes from the Federal Reserve. The S&P 500 fell -2.8% last Friday and the ASX 200 is currently down 1.55%.

China: iron ore inventories down, steel output up

In early September, Breakwave Advisors talked about how there was a "very solid chance that China's steel production bottomed in late July."

This view was supported by a relaxation of covid-related restrictions, improving steel mill margins and China cutting its five-year loan prime rate by 15 bps to 4.30%.

Recent data from Mysteel further validates the June low, with daily crude steel output continuing to grow over the last ten days of September. Volumes were up 27,600 tonnes a day or 1.0% from the prior ten days to average 2.91m tonnes a day.

"The continuous increase in crude steel output indicated that many Chinese steelmakers ... preferred to maintain their production at a relatively high level in September and October - the traditional peak season for steel consumption with pleasant weather in most regions of China," said Mysteel.

Economic data remains fragile

China might be heading into a seasonally accommodative period for commodity prices but the country's economic data serves as a reminder that demand is walking on a very thin line.

Over the weekend, China's services activity contracted for the first time in four months in September. The Caixin services purchasing managers' index fell to 49.3 in September from 55.0 in August amid renewed covid-related restrictions.

In addition, Chinese new home sales by floor area fell -37.7% year-on-year over the week-long National Day holiday, according to Reuters. Sales was dented by covid-related curbs and already fragile demand.

The pivotal 20th Communist Party National Congress meeting will kick off on October 16 and present the nation's roadmap for the next five years.