Dear Reader,
The last time that iron ore prices — the 62 percent iron content futures contract seen on investing.com — fell below the $100 mark was in September 2022. That lasted only for a few months before it climbed back above the mark in November 2022. Then began a rally in price that took them all the way to nearly $140 a tonne levels. It's been a steep fall that shows little signs of stopping.
The main elephant in the metal strong room is China’s economy that has hit the breakers. It was partly hopes of a post-lockdown economic gallop that contributed to the price levels soaring and then falling as realisation dawned that it was not to be. Iron ore's fall has sent steel prices in a decline as it’s the main steelmaking ingredient.
This scenario is playing across key industrial metals, including non-ferrous metals such as aluminium, copper and zinc, although not as acutely visible as in iron ore and steel.
The recently released data out of China for July showed that unemployment rose to 5.2 percent compared to 5 percent in June and industrial production rose by 5.1 percent YoY, slower than 5.2 percent in June. Investment in real estate declined by 10.2 percent in the seven months to July, as against 10.1 percent till June, indicating a further slippage. Similarly, fixed asset investment rose by 3.6 percent till July compared to 3.9 percent till June. The one bright spot was retail consumption that grew by 2.7 percent in July, higher than estimated.
It’s become clear that China is not in a hurry to revive growth through major stimulus measures having learnt from past mistakes on this front. However, at the same time, it’s not reining in industry to produce less of what it does in response to slowing demand. They have made investments with easily-available debt at one time that has to be serviced now. Therefore, in sectors where there is an export market for their products, they are stepping on the pedal. Recently, state-owned Chinese steel giant China Baowu Steel Group warned of a severe crisis, more serious than the 2015 and 2018 crises.
In metals, this has resulted in Chinese metal flowing into other markets with nearby Asian markets facing the brunt of it. This has led to a situation where the weak Chinese economy has led to a fall in commodity prices such as iron ore and even coking coal, which in turn has meant a lower cost of production for Chinese companies. Weak domestic demand has meant they have anyway turned to exports with a vengeance. For example, between January-May, China’s finished steel exports rose by 24.5 percent YoY by volume, according to a note by S&P Global.
China’s economic growth outlook means its metal industries are likely to be net exporters until the domestic economy revives. Since the government is letting the economy recover on its own steam that process is going to take time. Unless other countries put up tariff barriers, it will not be enough to prevent exports as desperate companies will export even if at a loss, in a bid to keep the factories running and cash coming in. India’s recent Budget did not hike duties on the metal complex, which indicates that the government is looking at the other side, that is lower metal prices mean lower costs for used industries, for infrastructure projects and ultimately even for consumers.
But as falling global prices feed into domestic price realisations, metal companies face a tough future. If users think prices are going to decline further, they may postpone purchases and that leads to a demand crunch, becoming a self-fulfilling prophecy of sorts. Where all this will end is not clear. Eventually, sanity will prevail taking the form of unprofitable capacity exiting the market or consolidation through M&A activity or Chinese state intervention to curb output. Or, the major global economies including China return to the growth path and create enough demand to meet output. Given the uncertainty, investors should have their guards up as these events play out.
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