Markets: Stabilising China boosts iron ore

The Tianjin spot price rose after signs the world’s second-biggest economy is steadying.

Bad news for those who forecast continued deterioration in China’s economy. It is stabilising and may very well meet the official growth target of 7.5 per cent.

Government support and a revival in international demand for Chinese manufactured goods bolstered July factory output to its fastest pace since the beginning of the year. Investment in urban infrastructure and railroads continues apace as any visitor to China will attest.

Chinese government debt remains under control, Beijing hastens to assure the world. That is a sop to some, notably Nomura, who have warned China’s financial system faces a crisis following record interbank lending rates in June as the government cracked down on shadow banking.

This is all good news for iron ore miners. Not so for those who forecast the price for the commodity falling below $US90 by September 30. Last night the Tianjin iron ore spot price rose, it is true, just a tad, to $US138.70 a tonne. Since May 31 when it was at $US110.40, the Tianjin spot price has jumped 26 per cent.

But those betting on further iron ore price rises better beware that steel output may be rising faster than demand after steel reinforcement bar inventory levels in China rose earlier this month for the first time since April.

Still, economists at Credit Suisse and Deutsche Bank are scrambling to raise their estimates for China’s economic expansion this year. Credit Suisse now says the economy will grow 7.6 per cent, up from a previous forecast of 7.4 per cent. Deutsche Bank estimates growth at 7.7 per cent, up from 7.5 per cent.

If such a revision up in economic growth forecasts becomes a trend among the investment banks, how soon before commodity analysts begin to publish research on their new iron ore price target?

That day may not be too far away.

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