Iron ore retreats as China’s zero-Covid policy outshines demand

By Onome Amuge.

Iron ore futures retreated into bearish territory as China, the world’s largest consumer, indicated that controlling Covid-19 outbreaks is more of a priority compared to the utilisation of the steelmaking ingredient.

On China’s Dalian Commodity Exchange, September iron ore stood at 782 yuan a tonne, falling off the four-week peak of 798.50 yuan recorded the previous day.

According to reports, Chinese steel mills had reduced their output in recent weeks, putting some of their facilities under maintenance earlier than usual, as weak demand and low prices attributed to Covid-19 lockdowns and bad weather squeezed margins.

In a note addressed to investors, Zhongzhou analysts said iron ore is still under pressure in the medium term. This is after a district in China’s financial hub of Shanghai ordered a three-day lockdown of some of its steel warehouses from July 26 after a residential neighbourhood in the district was classified as high risk following the detection of a coronavirus case there.

Beforehand, investors had been optimistic that more aid was on its way to revive construction projects stalled by a wave of repayment boycotts from homebuyers, but none was forthcoming during a key Politburo meeting.

“It appears to us that any change in the zero-Covid policy will only happen when authorities are convinced that mutations are less virulent and vaccines/medicines are proven to be more effective. Both are unlikely to happen in the near term,” Australia and New Zealand (ANZ) analysts said.

They also observed that unlike during a meeting held in April, where leaders spoke about supporting local governments to improve real-estate policies, the latest meeting spoke of a broader directive to stabilise the property market, without specifically mentioning more supportive measures.

In addition, party leaders also delivered a generally downbeat assessment of economic growth prospects.

“There’s no clear message that the central government will coordinate any property sector rescue, which is a bit disappointing,” the ANZ analysts said.