Despite the lockdowns, steel mill production actually lifted in the March quarter to an annualized production rate back around 1 billion tonnes.
That’s helped keep iron ore prices steady at about $US140 a tonne in the past week. While that is down from about $US150 a tonne at the start of the month, it is a long way from the $US100 a tonne most analysts had penciled in for the March quarter.
Strong iron ore demand
“Everything that we’re seeing would indicate that the Chinese government is committed to the GDP growth target, certainly from a steel mill perspective,” Gaines tells this column.
“Despite the lockdowns, we’ve seen that mills have maintained steel production and utilization in late March and April. And there’s very limited scrap availability, so that’s resulting in strong iron ore demand.”
Stocks of iron ore held at Chinese ports have dipped from a peak of 160 million tons in February to about 147 million tons, with Fortescue ore accounting for about 8 per cent of those inventories.
Gaines says this suggests steel mills are getting out ahead of the Chinese government’s efforts to stimulate the economy. “The steel mills are drawing down on iron ore in anticipation of growing steel demand and growing productivity.”
Infrastructure spending rose in the March quarter, facilitated by front-loaded local bond issuance. And the property sector crackdown that the Chinese government seemed obsessed with in late 2021 appears to have fallen by the wayside.
Gaines says the government has delayed several reforms (particularly around property taxes), lowered default risks for developers and is now trying to encourage house purchases again.
It’s important to note these measures were being deployed before this week’s COVID-19 panic. If China is to get anywhere near its 5.5 per cent GDP growth target, it will have to go even harder on stimulus.
Xi is acutely aware of this. On Wednesday night, the president told a meeting of economic officials that “all out efforts” must be made to boost construction, declaring the nation’s infrastructure “incompatible” with its economic ambition.
A range of other measures, from supporting the poor to the tech sector, were also announced amid a continuing stream of policy promises.
So if China can contain its omicron wave, then it’s not hard to imagine a surge in infrastructure spending in the second half of 2022. That might help already strong iron ore prices at least hold, and even strengthen, as China makes good on its promised infrastructure spending surge.
But the risk that China cannot defeat its omicron wave remains huge. Given the limited effectiveness of the local Sinovac vaccines, Xi cannot afford to live with the virus in the way most Western countries are, so the prospect that lockdowns could expand will continue to hang over the global economy and financial markets.
Stimulus promises might support the iron ore price for a while, but if lockdowns prevent infrastructure projects from actually going ahead, reality will eventually bite.
The full impact of China’s lockdowns on global growth and broader commodity demand is also unclear. Fortescue knows only too well that the lockdowns are already causing supply chain disruptions, having cited this as a reason the cost of its Iron Bridge iron ore project has blown out again.
These dislocations will only worsen as lockdowns drag on.