Iron ore has defied weakness in most of the commodity complex, with prices climbing to an eight-month high amid both positive sentiment and supportive fundamentals in China, the world's biggest buyer of the steel raw material.
Iron ore contracts in Singapore ended at $129.24 a metric ton on Monday, the highest since March 16, extending a rally since an Aug. 3 low of $103.21 to 25%.
China's main domestic iron ore market performed even better, with futures on the Dalian Commodity Exchange ending at 963 yuan ($132.10) a metric ton on Monday, the highest in local currency terms since May 2021 and 64% above this year's low of 587.5 yuan on May 25.
The strength in iron ore is being driven by renewed optimism that China's vast property sector is emerging from the gloom of recent months.
The most recent catalyst was a Nov. 8 Reuters story that revealed Ping An Insurance Group will take a controlling stake in Country Garden (2007.HK), China's biggest private property developer, which has been struggling with the same liquidity issues that have plagued some of its competitors.
Ping An has denied the Reuters story, and said it had not been approached by the government.
China's property sector accounts for about one-quarter of economic activity, giving it an outsized role in both growth and sentiment, and Beijing has made several efforts to restore confidence in the industry.
While Beijing has taken numerous steps to shore up the property sector, what remains to be seen is whether they will translate into an actual boost in activity, rather than just the current lift in sentiment.
INVENTORIES TO LIFT?
However, there are some fundamental reasons supporting iron ore, chief among them the low port inventories.
Stockpiles at China's ports rose to 108.8 million metric tons in the week to Nov. 10, according to data from consultants SteelHome.
This was up a modest 3.9 million metric tons from the previous week's 104.9 million, which was the lowest since October 2016.
Inventories haven't been following their usual seasonal pattern of rising ahead of softer steel demand over the northern winter, and then depleting as steel production rises to meet increased demand as the cold weather eases.
Stockpiles were 136 million metric tons in the same week in 2022 and 147.6 million in 2021, according to SteelHome data.
This indicates that inventories have considerable scope to rise in coming weeks, especially if steel mills are convinced that demand will rise in the first quarter on the back of a recovering property sector.
China, which buys about 70% of global seaborne iron ore, is on track for a solid outcome for November imports, with commodity analysts Kpler estimating arrivals at 102.2 million metric tons.
This would be higher than the official customs number of 99.39 million metric tons in October.
For the first 10 months of the year China imported 975.84 million metric tons, up 6.5% from the same period in 2022, according to customs data.
A downside risk to iron ore imports is whether Beijing will force steel mills to limit output in the final months of the year in order to meet an informal target that 2023 production shouldn't exceed the 1.01 billion metric tons achieved in 2022.
Steel output for the first nine months of the year was 795.07 million metric tons, leaving a "quota" of just 215 million for the fourth quarter, or about 71.6 million tons for each of the three months.
It seems unlikely that steel output will drop that much in the fourth quarter, given that in the first nine months of the year it averaged 88.34 million metric tons a month.
This makes it likely that 2022's 1.01 billion metric tons will be exceeded.
But perhaps the authorities are happy for this to happen, firstly as it will be help meet economic growth targets and secondly, a good chunk of the extra steel produced has been exported, with product shipments up 34.8% in the first nine months to 74.73 million metric tons.
The opinions expressed here are those of the author, a columnist for Reuters.
