Gloom
Earlier this month, iron ore prices had topped $US145 a tonne, the highest in two years, buoyed by demand from Chinese steel makers amid seasonal pre-ordering before the Lunar New Year when factories close for at least one week.
“I was left scratching my head about what on earth was generating $US130 to $US140 over the holiday period – it made no sense at all,” said Robert Rennie head of commodity and carbon research at Westpac. He estimates prices should be around $US120 to $US130 a tonne, based on rising inventory levels, waning steel production and “very weak” housing activity.
Iron ore is Australia’s single biggest export earner and investors will be focused on China’s December industrial production data, which includes steel and aluminium, due on Wednesday.
“We’ll be watching that very closely. Other data is suggesting that December steel production was weak,” Mr Rennie said.
Australian mining giants Rio Tinto and BHP will also this week provide insights on iron ore demand when they release quarterly production updates.
Record highs
So far, China’s purchases of iron ore have exceeded expectations. Data last week showed commodity imports, from iron ore to crude oil, coal and copper ore, soared to record highs, defying gloomy predictions related to the property market.
China’s debt-laden property sector accounts for about 40 per cent of the country’s steel demand.
Even so, there are concerns about the China’s economy, which is still struggling to recover from a pandemic-induced slowdown. Last week, consumer prices in the world second-largest economy fell for a third month in December, and factory-gate prices also declined, suggesting persistent deflationary cost pressures.
“China’s economy is still in need of further monetary support,” said Carol Kong, an economist at Commonwealth Bank. “The People’s Bank of China will likely want to prevent the real policy rate from rising, given CPI deflation and monetary easing can signal the government is committed to supporting the economy.”
She expects the central bank will lower a key benchmark – the medium-term lending facility – to 2.3 per cent by mid-year and cut the reserve requirement ratio twice over 2024. Yet on Monday, the central bank surprised by holding the MLF at 2.5 per cent, bucking expectations of a rate reduction.
China will also release fourth-quarter gross domestic product on Wednesday. Consensus suggests the annual pace accelerating to 5.2 per cent, from 4.9 per cent, in line with Beijing’s forecast of “around 5 per cent”.
Beijing will release its 2024 growth forecast at the annual National People’s Congress meeting in March. It is expected to announce a similar objective.
“Such a target may be a bit too ambitious for the economy this year given weaker domestic demand,” said Ms Kong, who forecast growth to slow to 4.9 per cent this year. “Without sufficient fiscal support, China could undershoot our forecast.”
The Australian dollar, which is sensitive to iron ore prices, edged up to US67¢, having climbed as far as US68.71¢ late last year on speculation the US Federal Reserve would cut interest rates at least six times this year, starting as early as March.
The Reserve Bank of Australia, in contrast, is widely expected to start easing mid-year, and bond futures are fully priced for only two rate cuts this year.
