The recent rally in iron ore has had more than a few people scratching their heads. China has been slowing and the major producers have shown no compunction about continuing to pour supply of ore into the market.
The price rocketed again overnight to $55.89 a tonne. That’s a 25% rally off the lows of July 9th.
By some calculations every $1 move in the iron ore price is makes around a $300 million difference to the bottom line of the Australian federal budget.
Overnight David Scutt reported on the best explanation we’ve seen yet for the price change: a rumour that Beijing is shutting down steel mills to clear the city’s notorious smog ahead of a parade on September 3.
This is from Metal Bulletin’s Iron Ore Index note last night:
China’s steel industry rumour mill has been in overdrive the past few days amid talk that Beijing is ordering steel makers from surrounding regions to cut production ahead of a key event in the capital. Beijing has ordered a stop on all construction activity in the capital ahead of a military parade which marks the 70th anniversary of the end of World War II on September 3.
The rumour could not be confirmed, but since the weekend the talk from local media and market participants is that the clean air policy has now been extended to steel mills in neighbouring areas, and that these will be required to stop or limit production in the period leading up to the spectacle. Mills located within 100 km around the capital are required to halt all production activities; those within 100-200 km have to cut their output by 50%. Steel makers located between 200 and 500 km away need to reduce production by one third.
The result is that demand has been spiking as mills bring forward production.
While it’s a rumour, it’s a very believable one, for two reasons. First, the flexing of military muscle has become one of the core themes of Xi Jinping’s regime. Second, tackling pollution has become a priority for Beijing, because it is becoming an issue not just for locals but for the overseas companies it needs to attract to major Chinese cities as it tries to shift the economy towards a more consumption-based future. In this context, images of the People’s Army marching through a smog-choked Tiananmen Square would be a terrible look.
And it raises a critical question for Australia about the long-term trajectory of the clean-air policy. It’s a powerful demonstration that Beijing can induce wild swings in the price of Australia’s biggest export, should it determine that it’s in its interests to do so.
Though it’s colourful, it also serves as a powerful reminder of how sensitive Australia’s open, medium-sized commodity-exporting economy is to policy decisions and demand in China. It also underlines how important it is for Australia to reassert some control over its own destiny by stoking activity in the non-mining sectors of the economy.
Here’s the chart of the iron ore price, with sympathy to forecasters in federal Treasury and everywhere else.