Iron ore prices slip as China trims its GDP target

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  • Higher iron grades rose on Tuesday while mid and lower-grades fell.
  • China’s services sector slowed sharply in February. China also lowered its GDP growth target for the year ahead.
  • Issuance of local government special bonds in China will increase sharply in 2019, something that should underpin infrastructure investment.
  • The Commonwealth Bank says the benchmark iron ore price may creep higher in the coming months. It will be watching Chinese inventory data for confirmation of steel mill restocking..

The spread between lower and higher grade iron ore prices widened slightly on Tuesday.

According to Metal Bulletin, the spot price for benchmark 62% fines dipped 0.8% to $87.03 a tonne, adding to the small decline reported on Monday.

58% fines also fell, settling at $68.28 a tonne, down 0.5% from Monday.

In contrast 65% fines rose by 0.7% to $98.90 a tonne, leaving it near two-week highs. Higher grade ore, more efficient when it comes to steel production, has been in demand in recent months, partially due to supply disruptions in Brazil and stricter industrial curbs in northern China on environmental grounds.

The mixed performance across spot markets came despite a modest rebound in Chinese iron ore and steel futures on Tuesday.

Rebar and hot-rolled coil futures in Shanghai finished at 3,793 and 3,777 yuan respectively, up from Monday’s night session close of 3,776 and 3,769 yuan.

Dalian iron ore futures also ground higher after logging early declines, ending trade at 623 yuan, up from 615.5 yuan on Monday evening.

The rebound came despite news that China’s services sector, now the largest part of the economy, decelerated sharply in February. China’s government also lowered its GDP growth forecast for the year ahead, targeting a range of between 6% to 6.5% rather than “around 6.5%” as seen in 2018.

However, while the lowered growth target could be regarded as a negative for steel and iron ore demand, another large increase in the quota for Chinese local government special bond issuance this year was seen as supportive of infrastructure investment in the period ahead.

“Special bonds have become the primary legal financing tool for local governments to support infrastructure spending,” said Kevin Xie, Fixed Income Quantitative Strategist at the Commonwealth bank.

“The 2019 special bond issuance quota rose from 1.35 trillion yuan to 2.15 trillion yuan.

“This increase is equivalent to 0.9% of GDP and bodes well for a continued rebound in infrastructure investment in 2019.”

As seen in the table below, there were limited moves in Chinese future in overnight trade on Tuesday, including for coke and coking coal contracts that finished almost exactly where they started the session.

SHFE Hot Rolled Coil ¥3,762 , -0.21%
SHFE Rebar ¥3,792 , 0.26%
DCE Iron Ore ¥619.00 , 0.24%
DCE Coking Coal ¥1,276.00 , -0.04%
DCE Coke ¥2,062.50 , -1.20%

The lacklustre moves in futures point to a quiet start for physical markets on Wednesday.

While the benchmark iron ore price has eased lower recently after hitting multi-year highs in early February, Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank, says prices could soon start to move higher, depending Chinese iron ore port inventories.

“Steel mills are now in margin protection mode, particularly with negative margins a real possibility over the next month,” he says.

“We expect steel mills to first draw down on their own iron ore stockpiles, before looking for low cost low grade iron ore. Port stocks would be the first preference for steel mills as port stocks tend to trade at a discount to seaborne imports for the same iron ore specifications. That could spark an aggressive fall in port stocks over the coming weeks and give the first glimpse of the tightness in physical iron ore markets.

“While we don’t expect iron ore prices to spike above $100 a tonne, we could see iron ore move into the $90 a tonne region as restocking demand intensifies.”

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