Iron ore continues to defy consensus expectations: So far this quarter, the CFR China import price index has averaged US$131/t vs. consensus expectations of US$115/t (Morgan Stanley: US$128/t). In our view, the unexpectedly high price is a function of 1) a tight spot cargo market; and more importantly 2) robust Chinese steel production growth, which is currently annualizing +10.4% YoY (vs. +3.7% YoY in 2012) and thus driving demand for iron ore as a result. This trend contrasts with lackluster demand growth in 1Q13 and raises the question as to where this output is going? This is a particularly important question as China is not exporting steel to an excessive degree, and steel inventory levels are continuing to decline, indicating a real increase offtake.
…Targeted stimulus? The divergence of these trends raises an obvious question, where is the steel going? Our channel checks cite strong auto and white good sales / manufacturing and government indications of more investment in infrastructure such as high-speed rail as key elements of this picture. Other market participants have maintained that the State Council has agreed to increase investment in the construction of railway and urban infrastructure to prevent GDP growth falling lower than 7.5%
Sounds quite logical to me. China is supporting its old industries with selective spending, it’s not enough to fire up the commodity shortages of old and growing iron ore supply has mills comfortable running lower inventories. I agree with the price range.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
