Iron ore’s rally over the last couple of months is looking increasingly brittle as hopes fade for the type of big-bang, infrastructure-heavy stimulus that China used to deploy.
Authorities have loosened monetary policy and rolled out or talked up a series of measures to support property and other parts of the economy since early June. This week’s Politburo meeting pledged more support for real estate and an easing of local-government debt burdens, which have slowed spending growth this year.
The actual policy detail is likely to be rolled out gradually over the coming weeks. There was no language from the meeting indicating major fiscal or monetary stimulus, however, and it’s hard to find anyone who sees a return to the type of massive outlays that Beijing kick-started its economy with after the global financial crisis.
Chinese consumer confidence has been decimated by years of virus lockdowns and delays on new-build properties, and our initial reaction to the latest Politburo pledges is “so what?,” said Atilla Widnell, managing director of Navigate Commodities Ltd.
“Any form of stimulatory measures will experience a material time lag of two to three quarters before it trickles down through the system into real steel and underlying iron ore demand,” he said. Authorities may also need to “forcefully encourage” property developers to deploy funds for their intended purposes rather than using them to rebalance highly leveraged balance sheets, he said. Authorities may also need to “forcefully encourage” property developers to deploy funds for their intended purposes rather than using them to rebalance highly leveraged balance sheets, he said.
Iron ore risks repeating its most recent boom-and-bust cycle. It surged from early November on optimism a post-virus economic rebound was coming, but then gave up more than half of those gains as the recovery faltered. The metal then started rallying again in late May on stimulus hopes. Iron ore slipped 0.4% to $112.80 a ton in Singapore as of 11:09 a.m. local time on Thursday, after falling 1.4% in the previous session.
Morgan Stanley said earlier this month it saw iron ore prices dropping to $90 a ton in the fourth quarter, while Goldman Sachs Group Inc. set a three-month target of $80 for the metal on July 13. Both banks reaffirmed their forecasts to Bloomberg after the Politburo meeting.