Iron ore in for a correction?

Published at May 9, 2016, in Features

Iron ore has been on a run lately, but the party could be over according to new data on Chinese steel sentiment.

According to data compiled by S&P Global Platts, steel sentiment is set to take a dive over May as weak domestic demand starts to bite.

Its index measures the sentiment in the Chinese market (70-85 China based market participants) on the likelihood of the domestic demand for steel going up or down, with a measure of less than 50 a decrease.

The bad news for iron ore bulls is that for the month of May, S&P Global Platts has measured domestic steel demand at 47.20, a contraction.

That’s a 23.65 point decrease from April, and comes as the amount of inventory held by traders jumps up to 67.68 on the index – a 31.23 point increase on the previous month.

It could be a short term measure, but S&P Global Platts’ steel and raw materials editor Paul Bartholomew thinks it could be the start of something.

“The big downturn in the outlook for domestic steel orders and prices is the big concern and unfortunately all the ingredients for a price correction appear to be in place, judging by the results of the index,” he said.

“The big and sudden shift from optimism to pessimism – particularly in the outlook for construction steel prices – is further indication of how sentiment driven the market has become.”

If steel sentiment in China is down, that is more than likely going to spell at least short-term trouble for iron ore producers in Australia – given Australia’s iron ore feeds the Chinese steel market.

Iron Ore has been on somewhat of a bull run since the start of the year, increasing from about $41 per tonne on the spot market to about $61 at last close.

It’s unclear whether the S&P Global Platts report in itself will have a massive effect on the price in the short term, but if the sentiment holds true then over the short-to-medium term cold water could be poured on the recovery.

Back in March the Chinese government gave the iron ore price a shot in the arm by unveiling an ambitious infrastructure program.

It officially targeted growth of 6.5% to 7%, seen as quite bullish, suggesting that the government would keep the foot on the accelerator rather than cool down.

As part of its infrastructure plans, it promised an 800 billion yuan ($A163.3 billion) spend on railways, and 1.65 trillion yuan on building roads – both of which require steel and therefore require iron ore.

But, it did prompt fresh concerns about the level of debt China was taking on.

Spiralling debt from Chinese private companies meant private debt is thought to be more than 200% of GDP – and that debt was run up constructing new buildings, roads, and rail.

So a brand new infrastructure spend when private companies are already over-leveraged?

In any case, it’s clear from the steel sentiment that any positive effects from the infrastructure spend announcement has run its course – and it’s likely that until individual projects are announced and steel rolls out of factories that the road for iron ore will continue to be a bumpy one.

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

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