Iron ore demand could decline if China does not stimulate construction

The price of one of Australia’s largest dollar boxes has risen, but the recovery can look different and disappear overnight.

China is once again exciting and the market is buying iron ore. Australia’s major export prices are up one-third from their lows. It’s time to invest in big miners!

Not so fast. We saw it all before.

Despite this obvious turn Iron ore cycle Due to some similarities with previous iterations, this time there is an atypical force to give investors a significant pause.

The first point is that so far China’s stimulus has been silent. This is especially true for the major construction sector. Promote demand for iron ore..

Approximately 40% of that demand comes from real estate construction, with the latest data (November 2021) showing a 22% year-on-year decrease and no improvement in sales since then.

In addition, the real estate developer’s de-leverage campaign that is responsible for this decline is not over due to the accumulation of defaults. Balance sheet stress in this sector has also contributed significantly to the complete collapse of land sales for development, with land sales in January down 70% year-on-year.

It may seem less important. However, land sales make up about one-third of local government revenues and support infrastructure spending. China’s iron ore construction demand..

Authorities are scrambling to fill the hole with more debt, but filling it is a huge gap. The amount of infrastructure may also decline this year.

So why Iron ore rally?? First, this is a kind of market behavior that we always see when speculators inspire China to make a purchase.

Second, and more importantly, China’s energy crisis last year still plays an important role in supporting iron ore and coke prices. How? This is because the steel recycling plant, which uses a large amount of electricity, has been shut down significantly due to the soaring electricity prices caused by the runaway coal prices.

The steel recycling sector is in direct competition with blast furnaces that consume iron ore and coking coal. Therefore, as the production of recycling decreases, the demand for raw materials increases, assuming that everything is equal.

Currently, the unprecedented 120 million tonnes of recycling capacity is offline, but will resume as soon as electricity prices normalize.

If everything goes online before China properly stimulates the construction sector again, demand for about 200 million tonnes of iron ore and 100 million tonnes of coking coal will disappear overnight.

Market expectations are for a significant increase in steel production and iron ore demand after the passage of the Beijing Winter Olympics in February. But instead, there is plenty of room for disappointment if steel recycling returns to the boom and crushes demand for iron ore.

David Llewellyn-Smith is the Chief Strategist of MB Funds and MB Supers.David is the founder and editor of MacroBusiness He was also the founder and editor of the World Economy, The Diplomat, the leading geopolitical and economic portal in the Asia-Pacific region. He was the co-author of The Great Crash and Ross Garnaut in 2008 and the editor of the second Garnaut Climate Change Review. The MB Fund underestimates Australian iron ore miners.

at first Australian iron ore recovery can disappear overnight

Iron ore demand could decline if China does not stimulate construction

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