Back from the brink.
After seeing their share prices lose 90% or more of their value over the past two years, shares in Arrium Limited (ASX: ARI), Atlas Iron Limited (ASX: AGO) and Mount Gibson Iron Limited (ASX: MGX) have rocketed up today, rising 29%, 36% and 6% respectively.
Have they finally stepped away from the cliff?
Had iron ore prices remained under US$40 a tonne for an extended period, a number of the above companies would have struggled to stay in business. Instead, the commodity has soared to US$63.74 a tonne, including an all-time record 18.5% on Monday evening.
Demand to soar?
That comes on the back of renewed confidence of a pickup in demand for steel, after the Chinese government yesterday vowed to boost spending and loosening monetary policy to engender growth.
China has set an economic target of 6.5% growth each year until 2020 – much higher than most forecasts.
The Australian Financial Review also reports that strong housing price growth in China’s tier one cities would lead to a pick-up in property investment.
Steel consumption in China fell for the first time in 2015, and further falls were previously expected this year. Steel prices have since jumped around a third in the past month, including a gain of 15% since Friday.
Much depends now on how the Chinese government follows through on its statements. Will it continue to prop up the Chinese steel industry? The China Iron and Steel Association reports that the industry suffered losses of 53.1 billion yuan ($8.2 billion) in the first eleven months of 2015. Reuters also reported last week that the debts of China’s major steel mills have soared to 3.2 trillion yuan (US$499 billion).
And China had previously said it needed to cut crude steel capacity by between 100 and 150 million tonnes within the next five years, as well as ban new steel projects and shut down so-called ‘zombie’ mills.
The latest reports suggest the steel industry may be propped up for a bit longer, which would likely lead to support for the iron ore price.
That’s on the demand side of course – the supply side looks very different. An estimated 100 million tonnes of new iron ore capacity is being added by Australian major producers to an already oversupplied market according to Vale’s head of China Mendes de Faria. Both BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are reportedly bearish on the iron ore price, with expectations of lower prices.
Where the iron ore prices goes from here really depends on what steps China takes with its steel industry. Prop it up and continue to maximise steel production and iron ore prices are likely to remain relatively high. But if the government follows through with its plans to cut production and reallocate workers to other industries, the iron ore price could fall as far as it has risen and as fast.
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Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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