China factory, building boom sends iron ore price to 6-year high

Reaching for the sky. Stock image.

Iron ore prices hit six-and-a-half year highs on Thursday as the Chinese construction and manufacturing sector experiences levels of activity last seen almost a decade ago.

According to Fastmarkets MB, benchmark 62% Fe fines imported into Northern China were changing hands for $129.92 a tonne on Tuesday, up 2.1% on the day.

That was the highest level for the steelmaking raw material since mid-January 2014 and brings gains for 2020 to over 40%.

Source: Capital Economics

A key gauge of  economic activity in China – responsible for more than half the world’s steel output and 70% of seaborne iron ore imports – released this week showed rapid  expansion of the country’s manufacturing and construction sector in August. 

The Caixin manufacturing PMI index rose from 52.8 in July to 53.1 in August, well above analysts’ expectations, which were headed for a decline during what is usually a slow month for industrial production. 

A reading above 50 indicates expansion, and August’s numbers were the highest since January 2011. 

While the official PMIs released by the Chinese government showed a slight drop in activity, the Caixin index is usually seen as a more reliable gauge as the survey covers a greater number of private and smaller companies than Beijing’s measure, skewed towards state-owned enterprises.

Rest of the world catching up

Capital Economics notes that the export orders component of the manufacturing PMI rose above 50 for the first time this year on the back of recovering foreign demand.

The London-based research company says this suggests that foreign demand is now beginning to catch up to Chinese domestic demand and hints at a further acceleration in export growth in the coming months. 

While China’s factories are humming, spending on infrastructure has rocketed. 

Since the outbreak of the pandemic, authorities have issued 4.75 trillion yuan ($683 billion) in local and national debt with most of that earmarked for infrastructure projects, lifting construction PMI’s above 60.

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