Iron ore rally hits a wall as China's covid cases continue to climb, Guangzhou locked down

The Baiyun District in Guangzhou, China has been locked down for five days from 21-25 November as covid cases continue to climb.

"The risk of social transmission of the epidemic in Baiyun District has continued to increase, and the prevention and control situation is grim," health authorities said on their official WeChat account, Reuters reported.

The lockdown news came out roughly as the market opened on Monday, which saw iron ore names like BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue (ASX: FMG) open flat and sell off.

BHP (blue), Fortescue (orange) and Rio Tinto (light blue)

A downhill battle

China's fighting a losing battle against covid as 7-day average cases top 35,000, up from 7,500 at the beginning of the month.

Source: Johns Hopkins University

Commodity markets have rallied on hopes a full Chinese reopening by early 2023, which might be at risk given the current trend in covid cases.

The new lockdowns in Guangzhou add further strain to China's already deteriorating economy. Economic data from last week including industrial production, retail sales and fixed asset investment all missed analyst expectations as covid outbreaks across the country have hurt consumer sentiment and disrupted business activity.

Short-term bearish thesis: Citi

Still, iron ore has rallied almost 20% in November from US$78.6 a tonne to US$93.7 a tonne.

"The recent rally in metals prices presents a near-term selling opportunity. China is unlikely to re-open until 2Q23 at the earliest and the Fed is probably going to remain hawkish," Citi analyst said in a note last week.

"Meanwhile, physical metals markets are loosening as one of the largest supply chain re-stocks in US and European history comes to an end."