Iron ore hits 6-month high as China’s growth plans kick into gear

Alex GluyasMarkets reporter

Mar 4, 2022 – 11.33am

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Iron ore prices rallied to a six-month high, buoyed by reports of a possible easing of China’s strict COVID-19 policy and signs of improved steel demand in the world’s second largest economy.

Futures on the Singapore Exchange surged 7 per cent to $US159.55 a tonne on Thursday, and edged higher to $US161.20 a tonne on Friday to the highest level since last July.

China’s PMI data this week showed that demand for steel is improving. Bloomberg

Prices were boosted by a report that said Beijing was considering an exit from its zero-tolerance approach to COVID-19, which could potentially end the stop-start nature of mainland economic activity since the pandemic began.

Experimental opening measures could arrive in select cities in China as early as June with the arrival of summer weather, the Wall Street Journal reported.

“With the prospect of China’s zero-COVID policy being eased, it creates a much more positive backdrop for the steel market in China,” said Daniel Hynes, senior commodity strategist at ANZ.

Signs that China’s stimulus is fuelling a rebound in growth were evident earlier this week in the country’s manufacturing purchasing managers index (PMI), which rose more than economists expected, to 50.2 against expectations for 49.8.

The non-manufacturing gauge, which measures activity in the construction and services sector also rose, to 51.6, ahead of consensus forecasts. The 50-level separates expansion from contraction.

“The outcomes suggest that front-loaded policy support is likely supporting demand already,” said Vivek Dhar, Commonwealth Bank’s mining and energy commodities analyst.

CBA said manufacturing PMIs in March are likely to provide a better read of the true state of China’s economy, given the effects of the Lunar New Year period in the first two months of this year. Heavy rain in south-east Brazil earlier in the quarter, linked to the La Niña weather pattern, boosted iron ore prices as local producers were forced to halt operations.

Fundamentals

The steel-making commodity’s latest advance also comes despite Beijing’s escalating intervention into iron ore markets, as it tries to cool the rally in prices.

Concerns about speculation and hoarding caused China’s state planner and market regulator to instruct traders to release excess inventory and verify concerns over speculation, dragging iron ore into a bear market just a fortnight ago.

Plans were then leaked regarding Beijing's intention to set up a single, state-backed platform for purchasing the bulk commodity.

However, strategists have expressed doubt about the effectiveness of China’s intervention based on previous attempts. Instead, they point to fundamentals as the key driver of iron ore prices.

“Even though China will continue to intervene in markets and pressure prices, to sustainably lower prices you need to see steel margins fall,” Mr Dhar said. “So long as this increasing steel demand is baked into the market, it’s difficult to see prices falling like policymakers are wanting.”

$A boost

Elevated iron ore and energy prices lifted the Australian dollar to US73.48¢ on Thursday night – its highest level since November. The currency remains on track to end the quarter near US74¢, CBA says.

The bank updated its fair value estimate of the $A earlier this week following the release of the Reserve Bank of Australia’s commodity price index for February.

Commonwealth Bank’s fair value for the currency now sits in the range of US78¢ to US90¢, centred on US84¢.