China’s Push for Infrastructure and High Steel Margins Propels ASX Iron Ore Miners

Iron ore prices took a U-turn in the global market amid emerging news of policy change in China for the Infrastructure development and steel inventory shortage in China, which increased the production margin for the Chinese steelmakers. The spike in iron ore prices fuelled ASX-listed iron ore stocks, which rose on the exchange.

The iron ore futures (Jan) on the Dalian Commodity Exchange rose from RMB 587.0 (Low on 11 November 2019) to the present high of RMB 633.0 (as on 15 November 2019 1:59 PM AEST), which underpinned a price increase of 7.84 per cent.

Likewise, the prices on the Chicago Mercantile Exchange rose from USD 80.30 (Low on 11 November 2019) to USD 82.52 (close on 14 November 2019), which marked a rise of over 2.76 per cent.

China’s Push for the Infrastructure Development

The local state media in China mentioned that the country would slash the minimum capital ratio requirement for some infrastructure investment projects and would further reduce the capital investment ratio for ports and shipping infrastructure project from 25 per cent to 20 per cent.

The state media also mentioned that the minimum capital investment ratio for the social services infrastructure would be reduced by 5 per cent, which in turn, would increase the effectiveness of the investments in infrastructure projects across China.

The push for the infrastructure raised speculations across the domestic market in China over the higher consumption of steel, which is already facing a deficit in China amid higher demand from the downstream sector.

As we discussed in our previous article ASX Iron Ore Stocks Under Pressure Amid Weakening Iron Ore Prices, the higher volume coupled with the high margin on steel production in China supported the iron ore prices.

The supply chain, which remained strong previously in China, demonstrated slight weakness, and the iron ore inventories across the major ports in China declined amid lower arrivals and increased demand.

Iron ore stocks across the 35 significant Chinese ports plunged by 2.05 million metric tonnes to stand at 114.4 million metric tonnes (as on 15 November 2019), which remained 16.86 million metric tonnes lower against the previous corresponding period.

While the port stocks remained low, the demand for steel witnessed an increase in the domestic market, which in turn, further reduced the steel inventory across China. The inventory of steel rebar dropped in China for the fifth consecutive week (as on 14 November 2019) amid robust demand in south China over the commencement of operations across the local construction sites.

Rebar inventories across steelmakers plunged by 4.7 per cent to stand at 2.06 million metric tonnes (as on 14 November 2019) against the previous week, while the social warehouse inventory witnessed a 9.1 per cent fall to stand at 3.03 million metric tonnes.

The overall inventories (including mills and social) dropped by 7.3 per cent to stand at 5.09 million metric tonnes (as on 14 November 2019).

The inventory of hot-rolled coil (or HRC) steel also witnessed a decline in China amid strong demand. The HRC stocks across the social warehouses fell by 6.2 per cent to stand at 1.85 million metric tonnes (as on 14 November 2019).

Apart from the robust demand, the maintenance work at the port of Baiyuquan delayed the northern cargoes carrying 120,000 metric tonnes of coil and plate stranded at the port from moving to the social warehouses across China.

HRC inventories across the steelmakers dropped by 5.2 per cent to stand at 844,800 metric tonnes (as on 14 November 2019) from the previous week, which coupled with the decline in the social inventories, reduced the overall HRC (incl both steelmakers and social) by 5.9 per cent.

The overall HRC stood at 2.7 million metric tonnes (as on 14 November 2019), which also remained 14.6 per cent down against the previous corresponding year.

The shortage in steel rebar inventory propelled the near-month futures prices on the London Metal Exchange, and the contract rose from the level of USD 417.0 a tonne (low on 12 November 2019) to USD 422.5 a tonne (high on 14 November 2019), which underpinned a price increase of over 1.3 per cent.

Likewise, the prices of 3M HRC futures (FOB CHINA) rose from USD 431.2 (low on 12 November 2019) to USD 444.50 a tonne (high on 14 November 2019), which underpinned a price increase of over 3 per cent.

The demand push for iron ore by the steelmakers in China, coupled with the lower arrivals supported iron ore prices in the global market, which in a cascade, supported the ASX-listed iron ore stocks.

Champion Iron Limited (ASX: CIA)

The stock rose from the level of $1.750 (low on 13 November 2019) to the present high of 2.090 (high on 15 November 2019), which marked an increase of over 19.40 per cent. The stock has delivered a decent return over the medium to long-term, with a return of 921.05 per cent over the last five years (as per yesterday’s close) and a return of 52.16 per cent over the last one year.

On a YTD basis, CIA delivered a return of 69.43 per cent, while over the last six months the stock delivered a return of -20.82 per cent.

BHP Group Limited (ASX: BHP)

BHP does not mine only iron ore, since the stock holds exposure to various commodities, the iron ore prices do impact the stock of the company amid its high exposure towards the iron ore mining and customer base in China.

The stock surged from the level of $36.180 (low on 14 November 2019) to the present high of $37.550, a rise of over 3.78 per cent.

As per yesterday’s close, BHP delivered a return of 27.44 per cent over the last five year and a return of 19.56 per cent over the last one year. The stock managed to deliver a return of 13.99 per cent on a YTD basis, while the returns delivered by the stock over the last six months stood at 0.79 per cent.

Rio Tinto Limited (ASX: RIO)

Rio rose from the level of $91.010 (low on 14 November 2019) to the present high of $93.950, which underpinned a price increase of 3.23 per cent.

Rio delivered a return on 60.98 per cent over the last five year and a return of 23.24 per cent over the last one year.


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