Beijing’s clear skies prove a dark cloud for iron ore
ROCKETING production is hammering the price of iron ore and now another, unexpected, issue is hurting the market: China’s hospitality.
ROCKETING iron-ore production has hammered the price of the steelmaking ingredient this year, but now there is an unexpected issue hurting the market: China’s hospitality.
China’s push for clear skies at a global summit in Beijing is delivering the latest knock to iron ore that has tumbled sharply this year on record output from Australia’s major miners.
It is a reminder of how the world’s No. 2 economy still influences the global commodity markets, even in unexpected ways.
Steel mills and factories have been temporarily closed for the high-profile Asia-Pacific Economic Cooperation forum in an effort to clean up the pollution that frequently blots the capital.
“Chinese steel production has been severely curtailed over the past week, “ said Citi analyst Ivan Szpakowski.
Steel “demand in northern provinces has also been strongly affected” as much construction activity has ceased, he added.
Mr Szpakowski today downgraded his forecasts for iron ore to $US65 a tonne next year and the year after, a cut of nearly one-fifth on his prior estimates and lower than the spot price of $US75.50 a tonne. He said he thinks prices will briefly dip into the $US50s in the second half of the year as the glut of surplus material balloons.
Chinese authorities have limited traffic and enforced a “special air pollution control plan” that involves shutting factories to reduce smog, for the duration of the gathering that includes US President Barack Obama and Japanese Prime Minister Shinzo Abe.
Heavy polluters across provinces including Hebei and Shandong, major steel-producing regions, were told to take a break, as Beijing also placed restrictions on road traffic and replaced nearly half a million flowerpots downtown to spruce up for the occasion.
The official Xinhua News Agency last month reported Chinese authorities planned to reduce air pollution in and around Beijing by as much as 40 per cent during the summit. The skies are clearer, although pollution levels have been mixed day-by day.
While no official figures on the potential impact on industrial production have been released by Beijing, Australia and New Zealand Banking Group estimates steel mills with a combined annual capacity of 100 million tonnes were hit by the restrictions. That means about 4 million tonnes of steel production may have been lost — a drop in the ocean against China’s annual output of 800 million tonnes, but enough to rattle confidence in a market that is already worried about the nation’s waning appetite for iron ore.
Iron ore is down nearly 6 per cent over the past fortnight as the output restrictions took hold, trading at its lowest level since June 2009 and 44 per cent below the price the red dirt attracted at the start of the year.
As the biggest buyer of many natural resources, including copper and cotton, global investors are focused on every utterance of a Chinese official and every snippet of the country’s economic data. But even one-off events like the APEC summit, with the country finding itself under the international spotlight, can have salient consequences on the demand for and prices of some of the world’s most important commodities.
In early 2008, diesel prices rocketed on stockpiling in China ahead of the Olympic Games. The country hoarded supplies to ensure it had a backup for its unreliable power grid at a time when millions of eyes around the world were on Beijing.
That demand spike played a key role in oil’s climb to its record of $145 a barrel.
Of course, the recent steel-output cutbacks upsetting prices are only temporary. And some analysts say the impact has been more potent in terms of sentiment than real demand for the commodity.
Still, there are few bullish on its outlook and analysts are turning more sour on the outlook.
RBC Capital Markets on Sunday cut its iron-ore forecasts by 11 per cent — 16 per cent over the next three years, including slashing its 2015 expectations to $US85 a tonne from $US100 a tonne previously. ANZ has also this week cut its forecasts.
“It is a constant grind lower at the moment,” said Ian Roper, a Singapore-based analyst for broker CLSA.
Government data over the weekend showed iron-ore imports rose 17 per cent from a year earlier in October, suggesting demand for foreign ore may not be as weak as anticipated. Analysts are worried about how much steel China actually needs, though, as its exports of the finished product rise sharply.
Domestic purchases of steel have been waning due to the weak property market. China’s construction industry consumes half of its steel.
“Iron-ore demand has hit a speed bump in what was already an oversupplied market,” said Ric Ronge, a Melbourne-based fund manager at Pengana Capital. “In terms of the big picture, the environmental restrictions are a fringe issue, but without demand to clear the market any sort of recovery has been pushed out.”
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