Speculation surrounding increased Chinese infrastructure investment saw iron ore prices surge to fresh multi-month highs on Monday, helping to boost Australia’s listed iron ore miners in early trade on Tuesday.
By David Scutt
“The Chinese politburo once again mentioned a boost to infrastructure spending as a way of supporting growth next year,” ANZ senior commodities strategist Daniel Hynes told clients. “The meeting of Chinese leaders also failed to mention any constraints on housing, signalling a milder policy tone for the sector.”
Commonwealth Bank energy and commodities analyst Vivek Dhar told clients the remarks suggest Chinese policymakers may prioritise shorter-term economic growth, rather than longer-term reforms, next year given the slowdown in the economy this year.
“The tone of the comments suggest that policymakers will lean towards growth stability over reform in 2020, suggesting that easing measures and infrastructure spending are likely on the cards,” Mr Dhar said.
Speculation over increased stimulus measures to support the economy ensured big gains in Chinese iron ore futures on Monday.
According to data from the Dalian Futures Exchange, iron ore futures for May delivery spiked 5.6 per cent to ¥653 ($136) per tonne. On several occasions futures hit “limit up” 6 per cent, meaning the only factor preventing further gains was that contract specification from the exchange operator prohibited them.
The strength in futures spilled over into physical markets with the spot price for benchmark 62 per cent iron ore fines surging 5.5 per cent to $US93.93 a tonne, according to Fastmarkets MB, leaving it at the highest level since October 8. The percentage gain on Monday was the largest since September 2.
Iron ore fines with 58 and 65 per cent iron content also jumped more than 4 per cent to start the week.
Boosted by the prospect of increased infrastructure spending, Chinese steel futures also jumped to multi-month, helping to underpin steel mill profit margins despite increased input costs.
“Mills have seen a big improvement in margins that are now approaching peak-construction season levels,” analysts at Macquarie said in a note. “The main driver is a faster than expected inventory drawdown, both in traders’ warehouses and steel mills.”
The combination of improved profit margins and low inventory levels incentivises steel mills to up production levels, helping to underpin demand for raw materials, including iron ore.
Given the prospect of increased demand for raw materials, Australia’s listed iron ore miners have climbed in early trade on Tuesday.
Fortescue Metals has jumped to another record high, sitting up 0.6 per cent at $10.31 before midday, extending the rally seen so far this year to 168 per cent. BHP is also up 0.6 per cent at $38.29 while rival diversified miner Rio Tinto has risen 0.7 per cent to $98.06.
Suggesting the rally in physical iron ore markets may continue on Tuesday, Chinese futures rose by another ¥4 to ¥653 per tonne in overnight trade.
By David Scutt
David Scutt covers markets for The Sydney Morning Herald and The Age
Source Link www.smh.com.au/business
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