Iron Ore Prices

Aussie iron ore giants received some good news on Monday. Chinese manufacturing data for May bettered market expectations slightly. Both BHP Billiton [ASX:BHP] and Rio Tinto [ASX:RIO] will welcome the respite that this brings.
They deserve a bit of good news after all. It’s been a turbulent year for iron ore. It’s only worsened in the last few months as prices plummeted closer to US$50 a tonne. So how important are the positive manufacturing figures?
They’re not earth shattering. But they suggest that steel demand is rising which should help the iron ore industry stabilise after months of uncertainty over future spot prices.
The figures themselves don’t look too impressive at first sight. The government-backed Purchasing Managers Index (PMI) for May edged up by 0.1 points to 50.2 points. Simply put, it indicates that the manufacturing sector is operating above its long term average. And it backs up the trend in rising iron ore prices in the last few weeks.
In recent weeks the price of the mineral has settled above US$60 per tonne. It’s not at the US$180 level it was in the mining boom’s heyday. But it’s still a reasonable improvement from the US$50 lows seen as recently as March.
So what does the manufacturing data tell us?
For one, it proves that construction orders are normalising again. Construction orders for materials like steel contribute to total manufacturing output. So a higher PMI number suggests construction across the economy is picking up again.
That matters deeply to iron ore exporters. New property developments make up one third of all steel demand in China. As long China keeps building new dwellings, their demand for iron ore will remain strong.
So the PMI index indicates that construction has recovered to a more stable level. Sure, construction isn’t booming as it once was, but at least it’s not falling anymore.
Rising construction orders bucks the trend of slowing residential construction in China. But it remains to be seen whether construction can continue growing. The concerns over lagging rural migration to cities are an ongoing problem for builders. Without millions of new migrants to house, they’ll be relying on investors to keep housing demand high.