For Iron Ore Traders, Beijing Wasn't Built in a Day
PUBLISHED
2023-03-17
Content
Australian investors looking for an immediate hit to iron ore company prices from China’s re-opening had better be patient.
The rebound in Chinese crude steel production in the first two months of this year was not as strong as it first looked.
Along with the volume and source of iron ore imports, China’s crude steel production are monthly updates vital for Australian and global investors in some of the world’s biggest iron ore and coal mining companies - and their smaller rivals and investors.
Data from the National Bureau of Statistics this week showed China's crude steel output in the first two months of 2023 rose to 168.7 million tonnes.
That was up 5.6% from 157.8 million tonnes for the first two months of 2022.
Analysts said most domestic steel mills lifted up production in February in anticipation of a pick-up in demand in March from construction when winter ends.
China releases combined data for January and February to account for distortion created by the irregular timing of the week-long Lunar New Year holiday, which this year began on January 21.
But the two-month figure, while up on 2022, was down from 2021’s 174.89 million tonnes, even though that was a year in which Covid controls were in place, unlike 2023.
Analysts say the difference is the weaker demand this year from cars, whitegoods and the property and construction sectors - all of which reported weak figures for January and February.
Average daily output stood at 2.86 million tonnes, a rise of 13.8% from the daily average in December 2022 and 6.8% higher than the daily average of 2.68 million tonnes in the corresponding period in 2022, according to Reuters.
Being a mild winter, there were fewer days where pollution concerns forced steel mills in some of the major production centres (such as Tangshan) to curb output temporarily. Covid disruptions fell away after the New Year break as well.
China has rolled out some stimulus policies, particularly in the property market, to support the economy which had been constrained by the strict measures to contain the COVID-19 in the majority of 2022.
China’s crude steel output rose 2.3% to 79.5 million tonnes in January, data from World Steel Association showed earlier in February. That indicates February production topped a solid 89 million tonnes. That would be the highest since June, 2022 when it topped 90 million tonnes.
Iron ore imports also rose in the period, reaching 194 million tonnes during January and February, a year-on-year rise of 7.3%, and the highest ever for the two months combined, China’s two-month trade data showed earlier this month.
China has not made it clear whether it will stick to its policy of zero growth in annual crude steel production this year, but analysts expect annual output in 2023 to either remain flat or increase slightly. 2022 saw crude steel production dip 2.1% to 1.053 billion for the second yearly fall in a row.
And the impact on prices? SGX iron ore prices hit a 2023 high this Wednesday of $US132.18 a tonne for 62% Fe fines (Pilbara blend type). They fell to $US128.80 on Thursday after the weakish data for investment, retail sales and crude steel output was published the day before.
Prices above %US120 a tonne are still solid but a year ago in the heat of the aftermath of the Russian invasion of Ukraine, prices were around $US150 a tonne.
So for the big exporters like BHP, Fortescue and Rio Tinto (and not to mention smaller shippers like Mineral Resources) the comparison this half with a year ago is going to be poor and see sharply lower earnings for the six months to June.
Something to remind the bulls if iron ore continues at this level (and all shippers have higher production and shipping costs a year on as well).
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Chinese production data for the two months for most other metals were stronger than expected.
China said aluminium production rose 7.5% to 6.74 million tonnes in January-February from a year earlier, the highest output for the two months since at least 2015.
That compared with 6.33 million tonnes in the first two months of 2022, data from National Bureau of Statistics (NBS) showed.
New production capacity came on line in January and February in northwest Gansu province, and smelters in the southwestern region including Guizhou, Guangxi and Sichuan ramped up their production.
Production of 10 nonferrous metals - including copper, aluminium, lead, zinc and nickel - rose 9.8 % to 11.92 million tonnes in January and February combined, compared with a year earlier. The other non-ferrous metals are tin, antimony, mercury, magnesium and titanium.
The total nonferrous metal output was also the highest for a January and February period since at least 2015, the NBS data showed. That at least was good news from the re-opening.
That is good news for companies like BHP, Rio Tinto, Glencore, OZ Minerals and others producing base metals, especially copper.
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Finally, China’s central bank has again shown how skilful an investor it is - adding to its already vast holdings of the metal in February - when global prices dipped well under $US1,900 an ounce - to pick up around 25 tonnes.
It was the third purchase in four months by the People’s Bank of China which this week saw its head, Governor Yi Gang, retained for another five years.
February’s purchase follows about 32 tonnes of gold added in November, the first officially recorded increase since September 2019.
By the end of February, China's total gold reserves rose to around 2,050.34 tonnes, PBOC data showed.
The 25 tonnes bought last month was almost as much as the 31 tonnes in total that central banks picked up in January, according to the World Gold Council.
According to Krishan Gopaul, Senior Analyst at the World Gold Council, three banks accounted for gross purchase of 44 tonnes, while one bank reported sales of 12 tonnes.
The largest gold buyer in January 2023 was the Central Bank of Turkey, which added 23 tonnes of gold to its official reserves. That was after it bought 148 tonnes in 2022.
And while the European Central Bank (ECB) recorded marginal rise in its gold reserves of 2 tonnes in January, the Central Bank of Uzbekistan was the most notable seller, cutting its holding by almost 12 tonnes during the month to 384 tonnes.
Talking about the February purchase (he didn’t mention January’s buy), vice-president of the China Foreign Exchange Investment Research Institute Zhao Qingming said gold plays an important part in central banks' international reserves management. The US, Germany and Italy, among others, hold large stockpiles of gold reserves and lead other countries by a considerable margin.
"Compared with them, China's gold reserves remain at a modest level while foreign exchange reserves take the lion's share," he was quoted as saying by state media.
He made the added point that the recent moderate increases will help optimise the country's international reserves portfolio and make it more resilient amid growing uncertainties and volatility both on the geopolitical and macroeconomic fronts.
By the end of January, China had the world's seventh-largest official national gold reserves, according to the World Gold Council data.
The US and Germany are the two largest holders of gold reserves with 8,133.5 tonnes and 3,355.1 tonne, respectively, the WGC said.
Central banks added a whopping 1,136 tons of gold worth some $70 billion to reserves in 2022, by far the most for any year since 1967, the WGC reported in late January.
For the past four or five years, central banks have been a mainstay of the gold market. Since 2011, central banks have bought a total of 6,815 tonnes of gold, or more than 524 tonnes each year.
To average 524 tonnes a year means monthly purchases will have to be around 45 tonnes a month - China’s purchases at the start of the year and those from Turkey and probably India, keeps that on tract for an ‘average’ year.
The continuing banking crisis should encourage traders to re-emerge and overlook rising interest rates - which are close to the end anyway as inflation fades, slowly.
The news of the Chinese additions - especially in February was overlooked by the gold market this week which was too busy saying whopee in the wake of the Silicon Bank collapse and stepped up fears about the stability of the US and parts of the global banking system.
That saw Comex prices leap nearly $US100 an ounce in three days to well over $US1,900 an ounce before settling back
Gold traded at $US1,814 an ounce in December and rose in early 2023 to just over $US1,900 an ounce (touching a high of $US1,943 an ounce in January) before slowly fading as the early enthusiasm about a slowing in central bank rate rises (and inflation) were put aside when the reality of sticky cost pressures and higher rates for longer, hit home.
But these moves in supply and demand were overshadowed by the central bank buying spree.
The WGC said annual central bank demand more than doubled to 1,136 tonnes last year up from 450 tonnes the year before and to a new 55-year record high.
Just try and imagine what the gold price would have done had the central bank buying been halved?
Purchases in the December quarter reached 417 tonnes (after 399 tonnes in the third quarter), bringing the total for the second half of 2022 to more than 800 tonnes.
The WGC said most of the central bank purchases were unreported, although the People’s Bank of China (PBOC) did reveal two purchases totalling 62 tonnes late in 2022 (and before last week’s announcement in Beijing).
The WGC said the announcement in late 2022 by the PBOC "were significant given China’s historic position as a large buyer of gold, having accumulated 1,448 tonnes between 2002 and 2019.”
"However, the Central Bank of Turkey reported the largest buying in 2022. Its official gold reserves swelled by 148 tonnes to 542 tonnes, the highest level on record.
The Middle East also saw active gold buying during the year. Egypt (47 tonnes), Qatar (35t tonnes), Iraq (34 tonnes), the United Arab Emirates (25 tonnes) and Oman (2 tonnes) significantly boosted their gold reserves.
The Reserve Bank of India added 33 tonnes tonnes in 2022 which was 57% lower than 2021 when it purchased 77 tonnes, the WGC said. Its gold reserves now stand at 787 tonnes (8% of India’s total reserves).
And all this means that with gold burbling because of the bank uncertainty there’s support from the most consistent supporters of the metal since 2011 - a group of central banks led by China, India and Turkey.