• Iron ore’s bull run could be brought to a halt by China’s weaker than expected economic growth target
• Goldman predicts price record for Rio Tinto
• Thermal coal prices keep dropping

Iron ore has been a bull’s game in 2023, with matadors speared to their death at every corner and the gamblers at the investment banks winning the price betting so far against the conservative sticklers at Australia’s Big Four.

Singapore futures were again up over 2% yesterday to US$126.90/t, not far off year to date highs of around US$131/t.

It came despite the weekend’s Two Sessions meeting, which was undoubtedly bad for demand signals for iron ore.

Last year’s growth rate in China of 3% was its worst performance since 1974 and many had expected the coaches of the world’s biggest planned economy to draw up a play for its quarterbacks that would help lead it well out of recession.

They have promised a growth target of around 5%, lower than market expectations of around 5.5%, and, tough for iron ore miners to take, want the underwater property sector to be stabilised rather than be used again as a growth engine.

“Markets were hopeful of a stronger growth target, particularly given China’s economy grew at only 3% last year,” Commonwealth Bank’s Vivek Dhar said in a note.

“Since 1972, China’s economy has grown at 3% or lower on three other occasions – 1974, 1976 and 2020.

“To put the 5% GDP target in context, in the year following these three occasions, China’s economy grew 8.7%, 7.6% and 8.4% respectively.

“Policymakers also hinted at more subdued infrastructure investment. The quota of local government special bonds, one vehicle for funding infrastructure projects, implies lower infrastructure investment.

“China is a key driver of industrial metal and iron ore demand given China accounts for 40‑60% of base metal demand and 65‑70% of the world’s iron ore imports.”

 

Market supervision

China hasn’t given up on using other means to cool iron ore prices either.

According to Reuters, the National Development and Reform Commission, China’s state planner, has taken to Chinese social media platform WeChat to suggest crackdowns were needed to prevent the spread of what it called misleading pricing information, hoarding and speculation.

It’s worth noting few actual price agencies, who report trades between miners, traders and downstream customers, ever find evidence of these things.

China has plenty of motivation to find ways to pay Australian miners less, not just for the long term profitability of its steel mills.

Its diplomatic relationship with the Aussie Government, though better than it was under Scott Morrison, is hardly bulletproof.

Yesterday’s trade account would have been tough to take in that context. Australia’s balance came in at $11.688b, down from $12.985b in December and $13.491b in November on a seasonally adjusted basis.

Australia exported more than $10b of iron ore and concentrates for the second straight month, the first time that had happened since June last year, selling $10.99b.

According to the ABS, sales of iron ore fines to China rose 2.5% despite a 6.3% drop in export volumes, adding $171m to the total compared to the previous month.

While China may complain that prices have been driven by speculation, it can’t be denied that demand for steel products has been a driving force behind higher iron ore prices since its emergence from Covid-19.

Chinese reinforced bar was going for US$643.60/t yesterday or 4457RMB, while prices hit lows of under 3500RMB or US$500/t in late October and early November last year, a point at which around 80% of Chinese steelmakers were losing money.

Goldman Sachs last week put Rio Tinto (ASX:RIO) on its “conviction list” with a price target of $140.40 after upping its near term iron ore forecasts to $150/t. Trading at $125 yesterday for a market cap of ~$180b, that would eclipse Rio’s all time high from 2021 of $133.42.

The investment bank expects prices to remain above US$120/t in 2023.

GS says we are headed for a 43Mt deficit in the first half on stronger steel demand in China and weak seaborne supply.

“We note the recent ongoing recovery in Chinese property sales and uptick in Chinese blast furnace utilisation, steel production and rebar prices. Generally property sales lead starts which drives higher steel demand,” Goldman’s Paul Young and Caleb Heiner said in a client note last week.

“Furthermore, these dynamics are playing out while iron ore inventories at Chinese steel mills are at their lowest levels since 2016 with mills starting to restock in recent weeks. An improvement in Chinese steel prices and mill margins should also be positive for high grade iron ore.”

 

ASX iron ore stocks

Scroll or swipe to reveal table. Click headings to sort.

 

Thermal coal keeps falling

Iron ore has been on a tear in recent weeks, but thermal coal has been the opposite.

One of 2022’s big commodity winners, thermal coal is now at levels not seen since early last year before the invasion of Ukraine.

Front month futures were down around 3.5% to US$188.75/t for Newcastle 6000kcal thermal.

The extreme fall in thermal spot prices, which have more than halved so far this year, have triggered lower prices for some major coal stocks.

But others have prospered despite their exposure to thermal, with prices still higher than historical levels.

Whitehaven Coal (ASX:WHC) is down 17% year to date. But Yancoal (ASX:YAL), which announced a big dividend in February’s results season, is up almost 10%.

New Hope (ASX:NHC) has lost only around 3% of its value.

Fortunes have been different for met coal producers, with top quality coking coal among the top performing commodities in 2023, rising to around US$370/t.

Steelmaking coal miner Stanmore (ASX:SMR) is up almost a quarter, though Coronado (ASX:CRN) and Bowen Coking Coal (ASX:BCB) are in the red so far in 2023.

 

ASX coal stocks

Scroll or swipe to reveal table. Click headings to sort.

 

The post Bulk Buys: Is China’s cautious growth target the red flag that halts iron ore’s bull run? appeared first on Stockhead.