A promising sign for iron ore: China's steel production bounces from rock bottom

A deepening property rout and commitment to lockdowns has set China on an irrecoverable path away from the nation's GDP growth target of 5.5% for this year.

Amid such dire circumstances, sometimes the only way is up. And that's what Breakwave Advisors is thinking about China's steel industry, at least in the near-term.

"One positive issue that we have continued to stress in our Weekly Dry Bulk Reports and Weekly China reports is that there has been a very solid chance that China's steel production bottomed in late July," said Breakwave.

Improving from rock bottom

Daily crude steel production at large and medium-sized steel mills in China averaged 2.03m tonnes between 21-31 August, which is:

• Up 2% from the middle of August

• Up 7% from the low seen in late July

• Down -1% year-on-year

"The ongoing rebound in China's steel production is encouraging especially considering that it has been occurring at the same time that coronavirus cases and restrictions have been intensifying across the nation," notes Breakwave.

While the commodity research consultancy remains bearish on the rest of the world, they believe "China's economy has the best chance of experiencing the start of a rebound this year."

Yes, a stimulus driven rebound

China is one of few countries reporting inflation within the 2-3% target that most central banks abide by.

Last month, China cut its five-year loan prime rate by 15 bps to 4.30% from 4.45% and lowered its one-year loan prime rate by 5 bps to 3.65%. Which is rather extraordinary given most central banks are rushing to front-load interest rate hikes.

On Monday, Premier Li Keqiang expressed his plans to roll out more policies to stabilise the economy, with a focus on consumption and investment, Reuters reported.

“China will promote the recovery of consumption as the main pulling force and make greater efforts to boost effective investment," said Premier Li.

Encouragingly for iron ore, Li said China will seek to accelerate building key projects and "increase policy bank financing based on the needs of local economies."

Still, we've seen plenty of stimulus headlines from China year-to-date. Most of which have failed to steer the economy back on track. The latest Caixin manufacturing PMI slipped to 49.5 in August from 50.4 in July, indicating a return to contraction.

Fatigue kicks in for iron ore stocks

Iron ore majors BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue (ASX: FMG) have been on a V-shaped rebound after a brief dip close to year-to-date lows.

Between last Wednesday, 8 September and Monday 12 September, the three stocks rallied 8.7%, 7.4% and 15% respectively. The three-day winning streak is starting to see some fatigue on Tuesday, with most majors trading around breakeven.

It seems like the rather bullish stimulus statements from Premier Li overnight was not enough to inspire another big rally. Perhaps more time is needed to digest recent gains.

BHP 3-month price chart (Source: TradingView)