OPINION: China stimulus efforts haven’t delivered a promised surge in economic activity, putting pressure on steel mills, iron ore prices and big miners’ shares.
, China has spent most of this year caught in a bind between stamping out COVID-19 and stimulating the economy.The price of iron ore rose from about $US110 a tonne at the start of 2021 to $US156 a tonne in March, even as China’s draconian lockdowns raged, as traders and steel millsand hit China’s 5.5 per cent GDP growth target for calendar 2022.
“The more you produce, the more you lose,” an international trader told Platts of the steel mills’ plight. “The problem … is that monetary policy at this point is pushing on a string. Rate cuts and liquidity injections only work if there is demand for credit, which is going unmet because it is currently too expensive or too scarce,” he says.China is certainly not holding back on stimulus efforts, particularly in the areas that iron ore prices are most sensitive to.
But the results have so far been unimpressive. While house sales recorded their first month-on-month gains for the year in May, volumes were still 42 per cent lower than the prior year. New house prices recorded their ninth consecutive monthly fall in May, while sales of existing homes recorded their largest monthly drop since February 2015.Patchy economic activity because of lockdowns and a lack of confidence in the pivotal property sector is not a recipe for demand or confidence.
And embattled property developers would love to get their hands on funds, but they aren’t allowed to because the Three Red Lines rules, which impose restrictions on developer debt levels, are still in place. Of course, investors in BHP, Rio Tinto and Fortescue Metals Group need to keep this in context – even at current iron ore prices, the trio’s low cost bases mean they are making huge profits and still have the capacity to pay big dividends.
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