The iron ore price and the S&P/ASX 200 Index (ASX: XJO) are flying today after fears of an impending collapse of the Chinese property developer, China Evergrande Group subsided in the market.
Overnight, the material required for steel manufacturing rocketed 16.8% to US$108.70 per tonne. The ASX 200 also had a rip-roaring day and was trading up 1.18% just before the market close this afternoon.
Let’s take a closer look at today’s news.
Evergrande staves off collapse … for now
The big boost in the iron ore price was likely spurred by news that Evergrande would make good on the interest payment it owes bondholders today. Many analysts had been forecasting a possible default, putting pressure on iron ore prices.
As reported on Tuesday, Evergrande is due to pay roughly US$83.5 million (AU$116 million) of interest on its 5-year dollar bond today. Since then, the company has pledged to make a bond payment this week but did not specify how much interest would be paid on it.
This has allayed fears that the company could collapse and cause widespread damage to the global economy.
As my Motley Fool colleague Bernd has already reported today, AMP Capital Chief Economist, Shane Oliver doesn’t expect Evergrande is about to go through its own “Lehman moment” (referring to the collapse of Lehman Brothers in the US during the GFC in 2008). He says Chinese authorities are unlikely to let that happen.
At the moment, they want to send a message to property developers not to take on too much debt, he believes.
At the end of the day, they will support their economy. Not with a bailout for China Evergrande, but some sort of restructuring … which minimises the fallout.
Iron ore price snapshot
Despite the rally in iron ore prices overnight, the commodity hasn’t had it good in recent times. Since the beginning of the year, the price of iron ore has fallen 35%.
In fact, since peaking at over US$220 per tonne, the iron ore price has more than halved.
The BHP Group Ltd (ASX: BHP) share price, Rio Tinto Limited (ASX: RIO) share price and Fortescue Metals Group Limited (ASX:FMG) share price have all suffered heavy falls that roughly correspond with the falling iron ore price.
BHP shares are 14% lower in just a month. Rio Tinto shares are down 8% and FMG shares are down 21%.