TOL - 11th Nov, 2022
Lack of clarity on Chinese stimulus to hurt Aussie iron ore miners
Continued steel and iron ore uncertainty
China’s National Congress was held last month, and we have been following this closely to understand the implications for Australian stocks.
One key takeaway was the potential for continued uncertainty in steel demand, and thereby, for iron ore as well.
No short-term property support
President Xi’s speech focused on the long-term policy direction to achieve socialist modernisation by 2035, with little reference to short-term measures to boost an ailing economy.
This did little to boost confidence that stimulus measures of credit availability, and less restrictive property ownership guidelines, would rescue the property sector and by extension, steel and iron ore demand.
Property demand makes up over 25% of steel demand and, with building starts down almost 40% year on year through August 2022, there are no signs of recovery.
China building starts and steel demand
Furthermore, Xi’s reiteration that “housing is for living, not for speculation”, has been a consistent message of the past few years. This suggests that their growth and modernisation focus is on themes other than property. These include innovation & technology, decarbonisation & green development, national security & social stability, and the aging population challenge.
Looking forward, we see growth in iron ore supply, particularly out of Australia, Brazil and Africa, exceeding growth in Chinese demand thereby pushing the iron ore market into surplus and impacting price.
Seaborne iron ore supply and demand vs. the iron ore price
Source: Martin Currie Australia; as of 31 August 2022.
If China continues along this path and allows the property sector to wallow, iron ore pricing and resource companies may suffer along with it. Because of this demand overhang and its potential impact on resources stocks, we currently hold an underweight exposure to iron ore in our value equity strategy.
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The Martin Currie Australia Value Equity strategy seeks to maximise returns for longer term investors by investing in a high conviction portfolio of securities which are trading below our assessment of intrinsic value, whilst considering each company’s direction and quality. Learn more here.
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As Head of Research for MCA, Michael has oversight of the research function of the MCA investment team alongside his research coverage of materials and energy.
Michael joined Martin Currie Australia in December 1993 after working for four years in both London and Melbourne with CS First Boston. Prior to this he worked as a mining engineer for MIM. His significant industry experience as an engineer in the mining sector enhances his understanding of key drivers of resource companies.
Michael has a bachelor of engineering (mining) & economics from the University of Queensland, and is a CFA charterholder.
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As Head of Research for MCA, Michael has oversight of the research function of the MCA investment team alongside his research coverage of materials and energy. Michael joined Martin Currie Australia in December 1993 after working for four years...
Expertise
As Head of Research for MCA, Michael has oversight of the research function of the MCA investment team alongside his research coverage of materials and energy. Michael joined Martin Currie Australia in December 1993 after working for four years...
Expertise
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