Chinese stimulus boost steel production thus iron ore price

Newly introduced fiscal stimulus from Chinese government led to improvement in housing sector and construction, which in turn is boosting China’s steel industries again thus helping further recovery in iron ore prices.

As China’s ailing steel industry recovered on increased government spending in infrastructure segment, companies have started restocking iron ore for the peak construction season. China’s imports of iron ore rose 6.5% in last month. In wake of stimulus, China is expected to add another 100-120 million tons of steel capacity this year.

Thanks to Chinese demand, iron ore prices have increased more than 40% this year and more than 60% from its December low. Prices are almost on the way to touch $60/ton area.

Australian Dollar has gained lot from improvement in commodity prices, around 1000 pips from its low in January and likely to remain in high correlation with iron ore.

However, worrying part is that the recovery is not riding on improvements in fundamentals but on temporary stimuli. Global steel demand is expected to slow down around 1% this year after 3% drop last year. So it is highly likely, market will focus back again on fundamentals going forwards.