There's Steel in Iron's Rise
(Bloomberg Gadfly) -- Something is stirring in the world's iron ore markets.
As of last Friday, benchmark ore delivered to China's Qinhuangdao port was down 28 percent since the start of the year to $56.75 a metric ton. Then, suddenly, things changed: In just four days this week, it's recovered more than a third of those losses to $64.71, with Thursday's 3.8 percent gain putting the commodity into a bull market. Barring a major crash Friday, June will be the best month for ore prices since October.
That shouldn't be a complete surprise. China's official factory gauge released Friday came to 51.7 in June, matching its second-strongest reading since 2012 and smashing through the median 51.0 estimate of economists surveyed by Bloomberg.
As Gadfly wrote in early May, the idea that China's leadership would let the country's real economy stagnate on the eve of its biggest public political event in five years always seemed improbable. A few weird anomalies in the nation's steel market -- particularly a persistent price premium for rebar over hot-rolled coil, a reversal of the usual situation -- have suggested that the government has been spending to try to spark private-sector activity back into life for several months.
A couple of data points in recent weeks indicate that stimulus is starting to have an effect. Steel sheet in hot-rolled coils is still cheaper than rebar, but over the past month, the discount has been whittled from more than 20 percent to less than 10 percent of the coiled-sheet price. That's the narrowest gap since March, and suggests that more consumer-focused sectors, such as automobile and appliance manufacturers, are picking up the slack from the rebar users in the construction industry.
That better price performance tracks with a general improvement in manufacturing in recent months. Even before Friday's bullish PMI data, six of the 10 best months for industrial-profit growth since 2013 have occurred over the past year. In March, earnings rose 24 percent from a year earlier, the best pace in three-and-a-half years.
While port inventories of iron ore itself touched a record 141 million metric tons last week, elsewhere in the supply chain conditions are looking tighter.
Inventories of hot-rolled coil and rebar are at their lowest in five months, and an index of vehicles on auto dealers' lots, which has been at a worryingly high level of almost 60 all year, dropped to 51.8 in May. That suggests a backlog of unsold cars that have sat around since China raised taxes on larger models at the start of the year is finally clearing. Meanwhile, a Bloomberg Intelligence estimate of Chinese steelmakers' profits is hovering at 399 yuan ($59) a metric ton this month, its fourth-best result since April 2010.
Even the supply side, one of the main worries for iron-ore bears, has been surprisingly tight. Rather than flooding the market with the opening of Vale SA's vast S11D mine, Brazil's exports have actually been trending downward, probably as a result of lower iron ore prices and higher dry-bulk shipping costs hitting the profitability of its higher-cost central and southern mining regions.
While markets are finally waking up to the potential for higher prices in steel and its raw materials, they may still be underestimating things. The 19th National Congress of the Communist Party is another three or four months away. Anyone basing their forecasts on an assumption of no more stimulus before then could find themselves in for a rude shock.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.