China's National Development and Reform Commission stopped short of announcing new stimulus plans on Tuesday, sending shockwaves through Asian equity markets. In metal markets, iron ore prices plunged, proving Goldman analysts right in their recent note to institutional clients to "fade iron ore rallies."
"NDRC underwhelms relative to elevated stimulus expectations (little incremental and no hints at new local government special bond issuance). PBOC-owned newspaper running story that authorities are guiding against bank lending that goes directly to the stock market (probably a good thing)," Goldman's Rich Privorotsky told clients this AM.
Privorotsky said, "Iron ore -4%, copper -2 and hsi futures -7-8%. Off shore property stocks remain probably the single most volatile pocket of the equity market down nearly 20%."
Iron ore futures jumped nearly 29% from the lows of around $90 a ton beginning in late September on optimism that Beijing would boost the economy and oversupply conditions in China's steel industry would dissipate. However, when NDRC did not deliver additional stimulus today, iron ore went into meltdown mode, plunging 5% to the $105 level. Iron ore is a key ingredient for steelmaking, which has suffered amid a multi-year property crisis in the world's second-largest economy.
In a separate note, Hang Jiang, head of trading at Yonggang Resources Co. in Shanghai, was quoted by Bloomberg as saying, "There had been talk that the NDRC may announce trillions of yuan in stimulus, but it came out with nothing at all," adding, "The stimulus from China so far is not going to yield a significant turnaround for base metals."
Jiang pointed out, "We need to see stimulus feed into a real pickup in consumption before we can see big price rallies."
Perhaps that's why Goldman's Thomas Evans told clients two weeks ago that "any rally in iron ore prices should be faded."
"In the long term, steel overcapacity and growing supply in iron ore are the two biggest headwinds to ferrous supply chain, which can't be fixed any time soon. The indicator to watch is whether, when and how much iron ore production would be cut from junior miners for market to rebalance," Evans said.
In broader metal markets, aluminum, zinc, nickel, lead and tin were lower more than 2%. Bloomberg noted, "For the steelmaking staple, the seaborne market looks to be oversupplied. Unless and until China's mills start making more steel, and the nation's property crisis gets a proper fix, that's going to remain the case."
Fading the iron ore rallies is in play.
