Important news for the resource industry and Australia’s tax revenue comes via the Financial Times. It reports that Chinese leaders discussed ways to revive domestic demand this week after recent data showed the economy was below its target growth rate.
The article states:
“China’s leadership has signalled it will speed up public spending.”
What’s not clear is how, or to what extent, this may happen.
The now seven-year-long drawdown in the Chinese property market continues to suppress consumer demand. Fixed asset investment has also declined over the last three years.
Fund management house Chester recently showed that the property slump has gone on so long that domestic deposits are the biggest household asset.
Iron ore under pressure
Right now, this weakness is reflected in the iron ore price, which is trading around US$95 ($135) per tonne.
It was only the other day that the Australian Financial Review reported that fund manager Jun Bei Liu had taken a short position in Fortescue Group (ASX:FMG) due, in part, to concerns about softening iron ore prices. Liu also said: “China’s housing market is not going to turn around either, so we’re not going to see a sudden pick up in demand”.
The article also quoted Sean Fenton, Sage Capital chief investment officer, as saying:
“Chinese steel production and demand are contracting and there’s more supply coming online from Simandou and elsewhere over the next few years.”
Rio Tinto’s (ASX:RIO) analysts appear to disagree, suggesting there could be a 650 million tonne (Mt) shortfall in iron ore supply by 2035.
Fortescue released its quarterly report today (31 July), and operationally the company continues to perform strongly. It shipped a record 201.3Mt of iron ore for FY26, while FY27 guidance remains steady at 197–207Mt. Finances also look solid, with US$5.1 billion in cash and net debt of US$0.8 billion.
Considering the weak iron ore price, poor sentiment around China, and elevated diesel costs, the stock seems to be holding up reasonably well.
Analyst Michael Howell studies liquidity movement via central bank reporting.
He’s noticed an uptick in supportive activity from the People’s Bank of China lately
China’s next move in focus
Iron ore investors and resource market participants alike will want to see this continue for further commodity market strength.
Recent commentary suggests Chinese iron ore port inventories are sitting near record highs.
China may also be taking advantage of this period of weaker prices to strategically stockpile iron ore, much like it did with oil when crude traded below US$75 a barrel.
That gave the Chinese Government discretionary power to reduce crude imports during the recent Hormuz supply crunch. Those imports fell 40%, something few in the energy industry thought possible.
The Wall Street Journal reported recently:
“A single-country drop of that size hasn’t happened before, even during a major recession. China’s economy grew 4.3% in the second quarter. This was a slowdown from the first three months of the year, but hardly something that would be associated with a collapse in energy consumption.”
There may even be a geopolitical angle to these resource import and export considerations.
Iran and the US have both shown a willingness to close and control the Strait of Hormuz, which disrupts Chinese energy supply from the Middle East.
Chinese strategists and planners can’t completely discount the idea of other supply routes being blocked or tolled in a similar way.
It’s not unreasonable to think China will continue to import iron ore. What nobody knows is whether the potential Chinese stimulus will be big enough to lift the price back above US$100 per tonne.
Write to Callum Newman at Mining.com.au
Images: Unsplash
