Iron ore prices hit fresh six-and-a-half year highs
on Monday on the back of a Chinese construction and factory expansion boom.
According to
Fastmarkets MB, benchmark 62% Fe fines imported into Northern China were
changing hands for $130.17 a tonne on Monday, up 1.4% from Friday’s peg.
That was the highest
level for the steelmaking raw material since mid-January 2014 and brings gains
for 2020 to over 41%.
China is expected to
set a growth target of 5.5% in its 2021–2025 economic development plan, the
fourteenth five-year plan since 1953.
While that’s down from
the 6.5% GDP expansion target in the 2015–2020 plan, the relative size of the
Chinese economy today translates to more than $750 billion being added to its
GDP each year.
That’s the equivalent
of expanding by the size of the entire economy of Saudi Arabia,
Switzerland or Argentina each year. And most of the economic
activity will be directed to steel intensive industries including domestic
infrastructure, housing and transport.
Excavator sales in
China – a handy lead indicator for construction activity – are skyrocketing. Caixin reports sales are up 51.3% to just
under 21,000 units for the first eight months of the year.
That’s
already close to 90% of annual sales in 2019 according to according to the
China Construction Machinery Association.
Higher
forecast
FNArena, reports analyst at Citi, expects
positive growth in steel demand of 1–2% from its previous forecasts of a
decline of around –1%.
Citi expects iron ore
to fall back from its current lofty levels but remain in the $100–$120 range
for the remainder of the year. Citi had previously forecast iron ore to average
$90 a tonne. In its most bullish scenario, iron ore averages $110 in 2021.
Factory
expansion on fire
A key gauge
of economic activity in China – responsible for more than half the world’s
steel output and 70% of seaborne iron ore imports – released last week showed
rapid expansion of the country’s manufacturing and construction sector in
August.
The Caixin
manufacturing PMI index rose from 52.8 in July to 53.1 in August, well above
analysts’ expectations, which were headed for a decline during what is usually
a slow month for industrial production.
A reading above 50
indicates expansion, and August’s numbers were the highest since January
2011.