I’ll keep this short, as I’m not feeling the best today, but it’s hard to resist covering some rare good news for the Australian economy through the mist of recent dour data. From morning links
China steel futures hit their highest in more than six months on Monday, backed by a revival in demand in the world’s top steel consumer that has fuelled a buying spree for raw material iron-ore and lifted prices to levels last seen in October 2011.
Baoshan Iron and Steel, China’s biggest listed steelmaker, said it will raise prices for key products for a third straight month in February, reflecting rising raw material costs and a better outlook for steel demand.
China’s recovering economy is largely behind the optimism. Data last week showed manufacturing activity in the world’s No 2 economy was at its strongest since May 2011.
“Many are expecting improved demand for steel in the first quarter so most mills continue to produce at full scale and there has been somewhat a shortage of spot iron ore cargoes in the market,” said a Shanghai-based iron-ore trader.
Most iron-ore cargoes sold via spot tenders had been snapped up by big traders anticipating a further run-up in prices, spurring caution among mills wary of rising raw material cost.
The most-traded rebar contract for May delivery on the Shanghai Futures Exchange touched a session high of 4 047 yuan ($650) a ton, its loftiest since July 6. By the midday break, it was up 0.6% at 4 013 yuan.
Prices of rebar, used in construction, have rebounded by over a quarter from September lows. But iron-ore has far outperformed steel, surging 77% since hitting three-year troughs in September.
Benchmark iron-ore with 62% iron content <.IO62-CNI=SI> jumped 2.3% to $153.30/t on Friday, the highest since mid-October 2011, according to Steel Index. Rising prices of iron-ore, particularly those from top supplier Australia, are prompting some Chinese steelmakers to look for cheaper cargoes elsewhere.
So as H&H stated in his last post of 2012 back in Mid-December iron ore’s twirl towards freedom could have gone anywhere with the following upside possibility.
So, it’s a Christmas gift for Australia with iron ore surging to new post-bust highs. If the price can hold at these levels for three months all sorts of things will happen. Rate cuts will be off. The budget surplus will become a reality. The dollar will go to new highs. Roy Hill may even get funding.
We’re not quite there yet, and there are still questions about the sustainability of the rally even from the main players, but as Business Spectator reports this morning, prices over $140/t are about where the money starts flowing back to the government under MRRT.
Yes, given other data it’s going to be too little to save Mr Swan from his surplus promise , but he’s already given that away. Much more importantly IMHO is that a sustained higher price will scrape the moth-balls from projects and , as I’ve covered previously, this is important in terms of Australia’s economic stability given other factors. We get the PCI data at 9:30am this morning which I expect to come out on the poor side, but hopefully a bouncing iron ore price can provide some uplift in the trend and start shifting some of those dark clouds on the horizon.
The thing seems to be – as H&H stated some time ago – that it looks to be more driven by speculation of a return to the roaring steel demand of the massive Chinese anti-GFC government stimulus package than by actual steel demand in the here and now, although this very recently ticked upward.
The Shanghai Composite has bounced 14% since the leadership transition. So maybe the “word on the street” in politically connected circles is that the new team will provide enough stimulus to keep modest growth going, and will put off any painful reforms.
That may include enough new bridges-to-nowhere to keep iron ore above the $120 level that is apparently required to stop the Chinese iron ore producers in business.
Perhaps iron ore is yet another rigged market, with the (Chinese) government stepping in to bid up prices to a level that avoids any significant pain for connected interests.
Put another way, China is addicted to fixed asset investment and they have to keep building surplus apartments to avoid going into recession. Maybe there IS a $120 price floor, but it is maintained by government policy rather than by market forces.
And maybe the same applies to copper. Apparently lots of businesses in China have borrowed using stored copper as collateral, and a lot of people will get burned if copper drops significantly. And some of those people will be well-connected. This gives the Chinese government an incentive to intervene in copper markets to provide a floor under prices. If you can manipulate exchange rates and interest rates for the sake of stability, why not iron ore and copper as well?
Amazing that nobody here knows about India’s iron ore supply shutdown and how that is what is fuelling the price boom.
http://www.smh.com.au/business/world-business/indias-iron-ore-woes-aid-australia-20130102-2c4p2.html
Have there been any announcement (definite not rumours) of projects coming back on steam?
Good news indeed.
This is the single best piece of news for the Australian economy that I have read in a very long time.
Yes, except it allows us to stay one dimensional and sink back into our comfort zone.
Agreed. But still better than the alternative.
Indeed, though I suspect it is still not enough.
This will give us a bit more time to implement the necessary reforms we desperately need, which unfortunately are not appearing on the political radar yet…
It is very good news, but its indicative of how precarious our situation is when the price of one commodity affects our fortunes to such an extent.
Have to agree with you Leith – remains to be seen how long such pricing can be sustained but hopefully within a band of say 110-140 over time would be delightful. I suggest a little irrational exuberance in regard to MRRT – probably more important at this point in terms of ToT.
Long may it last.
No wukkas
http://www.smh.com.au/business/world-business/china-can-exceed-8-for-20-years-economist-20130108-2cdib.html
Hmm…how is coking coal going?