Hopes that Beijing will attempt to boost growth in the world’s second biggest economy sent iron ore prices soaring, offering more respite for embattled miners.
The collapse in the price of iron ore, the key ingredient of China’s unprecedented construction boom, has blown a hole in the earnings of some of Britain’s biggest dividend payers. However, hopes that the Chinese government would offer new stimulus sparked the best one-day performance in iron ore since records began in 2009.
Shares in the big London-quoted miners went sharply higher. Rio Tinto, the most dependent on iron ore of them, rose more tham 5 per cent, with Glencore up 6.6 percent, and BHP and Anglo American not far behind. All have either cut or announced future cuts to their dividends.
Iron ore prices fell from a peak in 2011 of nearly £190 a tonne to as low as $37 a tonne earlier this year. The key benchmark rose $10.20 a tonne, or 20 per cent, to $62.60 yesterday, according to The Steel Index.
Over the weekend, Li Keqiang, the Chinese premier, trimmed China’s growth forecast to between 6.5 per cent and 7 per cent and said that it would tackle unprofitable state-backed businesses “proactively yet prudently”, which spurred hopes that profitability would improve in the steel sector, in turn enabling iron ore prices to improve.
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However, there was widespread scepticism among analysts that the shock rise will last.
Ben Davis, an analyst at Liberum, said: “Everyone is very pessimistic and no one thinks it will last.”
He added: “It’s partly technical. Because two of the steel exchanges were closed on Friday, two days of volume was trying to squeeze through on one day’s activity. But even taking that into account it still makes no sense.
“The actual incremental, new news to get the market excited that China was off to the races again, in terms of fixed asset investment, was if anything slightly more cautious.”
The collapse in prices was triggered by a softening in China’s demand for steel because of a construction slowdown, which coincided with dramatic increasses in production by the world’s leading producers of iron ore, led by Rio Tinto, BHP Billiton and Vale of Brazil.
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A recovery in house prices in the largest cities has stirred some optimism that the construction industry will begin building again, although Liberum warns that the picture is far gloomier in the smaller cities where the vast majority of sales take place.
When iron ore was at its nadir in January, analysts reckoned that nobody outside the top three producers could make money from producing it. Hunter Hillcoat, an analyst at Investec, said that the resurgent price would defer the reckoning.
“Every rally like this simply delays the inevitable — we need a prolonged period of disincentive pricing to return balance to the market,” he said.