Construction data slump dents China’s iron ore market

The start of China’s peak construction season was supposed to finally boost demand for iron ore, which has endured a tempestuous year with prices now trading near this year’s lows.

However, the bounce has not happened, with traders now puzzling over what could be the next catalyst for a price rally in the crucial steelmaking material.

China’s usual boom period for infrastructure construction and steel-related demand in September and October has so far offered no reprieve for investors in the iron ore market, which just notched its longest streak of weekly losses on record. The Chinese economy continues to contend with a severe housing slump and COVID-19 lockdowns.

Bets that fresh financing for the property sector — which accounts for one-third of steel consumption — would aid demand recovery during the peak season have since unraveled, with the 100 biggest real-estate developers seeing sales of new homes last month plunge by one-quarter. That is even as financial regulators rush to stem the liquidity crisis, telling the nation’s six largest banks to offer at least 600 billion yuan (US$85 billion) of net financing.

While steel mills typically restock iron ore supplies before the Chinese National Day holidays at the start of October, their profit margins are also languishing and they are limiting purchases to a needs-only basis.

Meanwhile, China’s purchasing managers’ index last month rose only marginally to 46.6. A reading below 50 suggests contraction in the steel industry.

“It’s certainly the worst autumn since 2015,” Tomas Gutierrez, an analyst at Kallanish Commodities, said in e-mailed comments. “Real estate is far too big a part of the whole economy and no other sector can expand rapidly enough to make up for lost construction steel demand.”

Gutierrez was referring to the period seven years ago that also saw a sharp slowdown in China’s property and factory activity.