A China-driven rally in metals prices may be as fleeting as spring
THE spectacular leap of almost 20% in the price of iron ore on March 7th reveals a lot about the idiosyncrasies of commodities markets. Coming on the first trading day after the opening of China’s National People’s Congress, at which the government pledged to maintain GDP growth of at least 6.5% a year for the next five years, the jump may well have reflected renewed optimism about the appetite of the world’s biggest steel consumer. But the price of physical commodities tends to depend more on supply, demand and inventories than on the expectations of financial markets. So a giant flower show in Tangshan, China’s biggest steel-producing city, may be an equally good—and more fragrant—explanation for the sudden rally.
Tangshan’s authorities want their flowers to bloom under clean air during the show, from April to October, so they are curbing output at the city’s steel mills. Low inventories and the prospect of reduced supply over the summer have pushed up local prices, making mills even keener to operate at full tilt until the stoppage begins. That led to a scramble for ore, according to Tomás Gutiérrez of Kallanish Commodities, a steel-industry watcher. “People really panicked.”
In China as a whole, it is typical to build stocks of metals before construction picks up in spring. That may explain why many of them have rallied this year—albeit from very low bases.
David Wilson of Citigroup notes that the depreciation of the yuan has also encouraged traders to import extra ore in case the currency falls further. And Capital Economics, a consultancy, says one of the main drivers of the recovery in iron-ore prices may have been speculative short-covering—or the unwinding of bets that prices would fall further.
The new target for growth may also have played a part—even if China’s ability to meet it is hotly debated. Goldman Sachs, for example, says China’s main avenue for stoking metals demand would be the property market, but it argues that though there are more home sales and higher prices, there is no sign of this yet spreading into new construction.
Others argue that the strength of physical demand is not mirrored in China’s weak import data, or in low freight rates at sea. The downward pressure on metals prices is due as much to an avalanche of oversupply as a shortage of demand. In iron ore, in particular, there are no signs the glut in production in Australia’s Pilbara region is ebbing. By the time Tangshan’s peonies and chrysanthemums are in full bloom, the iron-ore rally may be long gone.