- Commodities dropped sharply in recent weeks on recession concerns and profit-taking.
- Iron ore registered one of the largest two-week drops on record, falling 22.5% at one point.
- Investors are worried about the pace of the reopening, the timing and nature of second-half stimulus, more evidence of a depressed property market, and burgeoning steel inventories.
- In a sign of incipient normalisation, most Covid restrictions have been lifted, iron ore imports are rising as ports reopen, and iron inventories are still falling.
- Still, iron ore is likely to be volatile in coming weeks.
Industrial Metals in Trouble
Industrial metals prices continued to slide as investors and companies brace for slower growth and possible recession, and China’s reopening from Covid lockdowns moves slowly at best.
SGX iron ore dropped from near $120 in late June to as low as $96 in recent days before recovering to about $101 (Chart 1). It is not just iron ore. Copper, a sensitive global barometer of industrial activity, has dropped sharply from a trading range near $450-$475 for much of 2022 to about $330 (Chart 2). Several crosscurrents will affect iron ore prices in coming weeks.
First, China continues to hew to zero tolerance for Covid. It tried to reopen Shanghai in June but pulled back when infections rose. Recent reports indicate new variants of Covid are appearing in different Chinese cities. Even though infections are very low, authorities are responding with mass testing, and further lockdowns remain a possibility. Returning to normal activity will be difficult while Covid remains a threat and this policy is in effect.
Second, China apparently has yet to launch its oft-mooted stimulus program. Earlier this month, reports indicated local governments might be permitted to issue up to 1.5 trillion yuan ($220 billion) in infrastructure bonds in the second half as an advance on next year’s quota. That would be comparable to the infrastructure portion of the 2009-10 stimulus program. Assuming China proceeds with this plan, implementation will still take months at best.
Third, China announced the creation of a new company to buy and deal in iron ore. The goal is to establish one organization to purchase all iron ore imports from Brazil, Australia, and Africa and hopefully reduce iron ore price volatility and speculative spikes. If successful, this could keep a cap on iron ore prices. But there is considerable debate on whether China can exert that kind of control over a global market even if the country imports about 45% of global production.
Iron ore continues to receive support from strong steel production. Mills are running at 90% of capacity even though steel demand remains soft as inventories rise and prices fall. To some extent, steel producers must keep mills operating; to some extent, they may be trying to front-run future mandated production cuts whether due to emissions or to control supply. Any slowdown in steel production would probably push iron ore prices lower.