Iron Ore’s Crash Tests Faith in China’s Stimulus Response

The worsening in Chinese demand conditions over the near term has sent iron ore prices into a tailspin, and the outlook for the rest of the year could be just as bleak.

Futures plunged on Monday on fears that the fast-spreading omicron strain of the virus has taken hold in Beijing, and that ever more areas of the country are threatened by the severe restrictions that have paralyzed the financial hub of Shanghai. Iron ore led losses but none of the other major industrial commodities were spared, with China’s crude markets potentially facing their biggest demand shock since the start of the pandemic.

Li Gao, a director at the environment ministry, told a conference in Beijing on Saturday that China needs to put reasonable controls on steel output. In practice, that means cutting production for a second year, as per the pledge from the government last week. Factor in the move to less-polluting methods of producing the alloy and that could mean that iron ore consumption has peaked.

Weak demand from the construction sector has already led to a pile-up in steel inventory during what should be one of the year’s main periods of activity. What will worry bulls is that Beijing’s willingness to reverse that with massive spending on public works seems to be in doubt.

In that vein, Capital Economics said in a note on Friday that it expects infrastructure stimulus to “merely provide a floor under prices as the government appears willing to tolerate slower growth in 2022.”