CLYDE RUSSELL: Iron ore imports might be sustained in China despite economy

Launceston, Australia — A swathe of poor economic data in China is putting pressure on the price of iron ore, which is struggling to hold above the key psychological level of $100 a tonne.

However, the run of soft indicators in China’s embattled property sector has yet to translate into a significant decline in the volume of imports of the main raw material used to make steel.

Commodity analysts Kpler and Refinitiv are estimating that August imports will top 100-million tonnes, which would be the first time this has happened since March's customs figure of 100.23-million tonnes.

Kpler is estimating that China, which buys about 70% of global seaborne iron ore, will see imports in August of 108.5-million tonnes, while Refinitiv has a more conservative 100.8-million tonnes.

While these figures are likely to be revised as more cargoes are assessed, it is likely that iron ore imports will rebound from July's official 93.48-million tonnes, which was the lowest since April.

It is likely that the lower spot prices for iron ore in recent weeks are encouraging traders and steel mills to boost imports. It is also the case that there is still optimism that Beijing will boost stimulus measures to shore up not only the property sector, but also other steel-intensive industries such as manufacturing and infrastructure.

Iron ore futures in Singapore ended at $103.47 a tonne on Monday, down 1.3% from the previous close and approaching the three-month low of $103.21 hit on August 3.

The immediate catalyst for the decline was more bad news in China's property sector, with major developer Country Garden seeking to delay payment on a private onshore bond, the first time it has done so.

The problems at Country Garden are stoking fears of contagion in China's property sector, which is facing a cash crunch.

Loans tumble

Adding to the property woes was data released on Tuesday showing China's industrial output and retail sales slowed and undershot forecasts.

Industrial output rose 3.7% from a year earlier, slowing from the 4.4% pace seen in June, while retail sales gained 2.5%, down from a 3.1% increase in June and missing analysts’ forecasts of 4.5% growth.

There was further bad news in data released on August 11 showing China's new bank loans tumbled in July, with the 345.9-billion yuan ($47.8bn) extended being down 89% from June, and the weakest since late 2009.

The weak lending figures added to the poor sentiment brought about by the world's second-largest economy slipping into deflation in July, the decline in both imports and exports and persistently soft manufacturing indexes.

Certainly the economic data isn't supportive of stronger iron ore import volumes.

This means that if the likely increase in imports in August is to be sustained in coming months, the market will have to believe that stimulus efforts will work and that steel demand will hold up, or even increase.

There are signs that the authorities are stepping up efforts to boost the economy, with the central bank cutting policy rates on Tuesday, the second reduction in three months.

Lower iron ore prices may also boost imports, but only if traders believe that they are likely to recover and that the downward pressure isn't the start of a new bearish trend.

Another potential factor supporting iron ore imports is the low state of port inventories, which last week dropped to the lowest in just over three years.

Port inventories fell to 116.5-million tonnes in the seven days to August 11, down from 120.5-million the previous week, according to data compiled by consultants SteelHome.

They are also below the 138.6-million tonnes in the same week in 2022 and the 127.2-million in 2021.

Overall, iron ore imports are likely to be caught between the reasonable fundamentals of weaker prices and low port stockpiles, and the bearish sentiment coming from the mounting woes across China's economy.

Reuters