Iron ore price jumps to fresh 6-year high on China building boom

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Iron ore prices hit fresh six-and-a-half year highs on Monday on the back of a Chinese construction and factory expansion boom.

According to Fastmarkets MB, benchmark 62% Fe fines imported into Northern China were changing hands for $130.17 a tonne on Monday, up 1.4% from Friday’s peg.

That was the highest level for the steelmaking raw material since mid-January 2014 and brings gains for 2020 to over 41%. 

That’s the equivalent of expanding by the size of the entire economy of Saudi Arabia, Switzerland  or Argentina each year

Boom times

China is expected to set a growth target of 5.5% in its 2021–2025 economic development plan, the fourteenth five-year plan since 1953. 

While that’s down from the 6.5% GDP expansion target in the 2015–2020 plan, the relative size of the Chinese economy today translates to more than $750 billion being added to its GDP each year.

That’s the equivalent of expanding by the size of the entire economy of Saudi Arabia, Switzerland  or Argentina each year. And most of the economic activity will be directed to steel intensive industries including domestic infrastructure, housing and transport.

Excavator sales in China – a handy lead indicator for construction activity – are skyrocketing. Caixin reports sales are up 51.3% to just under 21,000 units for the first eight months of the year.

Source: Fastmarkets MB

That’s already close to 90% of annual sales in 2019 according to according to the China Construction Machinery Association.

Higher forecast

FNArena, reports analyst at Citi, expects positive growth in steel demand of 1–2% from its previous forecasts of a decline of around –1%. 

Citi expects iron ore to fall back from its current lofty levels but remain in the $100–$120 range for the remainder of the year. Citi had previously forecast iron ore to average $90 a tonne. In its most bullish scenario, iron ore averages $110 in 2021.

Factory expansion on fire

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 last 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.