Iron ore swims against an outgoing tide

Summary: China's infrastructure push coupled with its anti-pollution drive is creating iron ore demand.

Key take-out: The US-China trade war could end up being a positive for BHP, Rio and others.

Uncertainty caused by the trade war between China and the US is being blamed for heavy falls in most mineral prices.

But iron ore, Australia's most valuable export, is an exception, with the benchmark price for premium material up 10 per cent over the past few weeks.

The iron ore rise, which has lifted the price for ore with a 62 per cent iron content to $US68 a tonne is significantly different to 15 per cent falls by copper and nickel over the same time, and a 10 per cent fall in the gold price, declines which qualify as technical price corrections.

Good news as the recovery in the iron ore price is for some of Australia's biggest miners, including BHP, Rio Tinto and Fortescue, the fact that one mineral is rising while others are falling raises a number of questions, such as the cause of the difference and whether the trend will continue, or reverse.

The second question is much harder to answer than the first because the future of the trade dispute is in the hands of just two people, the Presidents of China and the US and a wise investor would not try to guess what either man might do.

The first question, what's caused the difference, is a little easier to address, but is also a function of the trade war that could end as quickly as it started, though there is one factor at work in the iron ore price which should deliver ongoing good news for Australian raw material suppliers.

What's happening is a complicated mix of the trade war and the Chinese Government's increasingly aggressive drive to clean up the country's polluted environment which means liming the operating hours of some factories which encourages them to use premium raw materials, such as those sourced from Australia, to maximise metal production.

China's trade war reaction is expected to see a burst of domestic economic stimulation such as fresh infrastructure construction projects which will require increased supplies of steel for new bridges and an expanded rail network.

The challenge for the government is to achieve its domestic economic aim while enforcing its environmental clean-up aim, especially during the northern winter when pollution levels are at their worst.

Further complicating the Chinese challenge is that many of its older and lower-grade iron ore mines have been closed, increasing the steel industry's reliance on imports from countries such as Australia and Brazil.

The environmental crack-down, which helped lift prices for imported premium-quality raw materials last year, is reported to be expanding from the original target of the region around the capital Beijing and the major seaport of Tianjin, plus 26 regional cities, a policy dubbed “2 26”.

The new policy, as reported by Chinese news media is 2 80, Beijing and Tianjin plus 80 other cities, a significant expansion of the clean-up which is part of a “three-year blue skies protection plan”.

Winter is traditionally the worst time for atmospheric pollution in China because of the extreme cold in the northern provinces which is why December to February is known as the heating season with multiple sources of hearting in homes and offices adding to the pollution from factories.

ANZ Bank was the first to identify the potential impact on mineral demand and prices in a note sent to clients late last month under the headline “Building Bridges” with the key observation being: “If, as we suspect, China uses fiscal measures to boost growth the second half of 2018, lower inventories (of raw materials) should see consumers re-stocking quickly”.

That appear to be exactly what's happening as steel mills rush to replenish stockpiles to cope with expected orders from bridge and railway builders galvanised into action by the government to bolster domestic economic activity during the trade war, even as heating season nears as tough environmental rules are enforced.

Rio Tinto chief executive, Jean-Sebastien Jacques, touched on the changes in China's steel-making habits when commenting on the company's first-half profit result last week, saying that the drive to source higher-grade raw materials was unlikely to change.

For Australian suppliers of high-grade iron ore and coking coal used in China's steel industry the trade war with the US might turn out to be a positive development.