China's Lack of Additional Stimulus Measures Causes Market Turmoil

Goldman Analysts Proven Right About Iron Ore Rallies

China's National Development and Reform Commission (NDRC) refrained from announcing new stimulus plans on Tuesday, causing ripples in Asian equity markets. This development led to a plunge in iron ore prices, validating Goldman analysts' recent advice to institutional clients to be wary of iron ore rallies.

NDRC's Inaction Causes Market Shockwaves

Goldman's Rich Privorotsky informed clients that the NDRC's announcement fell short of the high stimulus expectations, with no hints at new local government special bond issuance. He also noted that a PBOC-owned newspaper ran a story suggesting authorities are discouraging bank lending that directly feeds into the stock market.

According to Privorotsky, iron ore fell by 4%, copper by 2%, and hsi futures by 7-8%. Offshore property stocks, one of the most volatile segments of the equity market, fell nearly 20%.

Iron Ore Prices Plunge

Iron ore futures had seen a near 29% increase from lows of around $90 a ton in late September. This was fueled by the expectation that Beijing would stimulate the economy and that oversupply issues in China's steel industry would be resolved. However, the NDRC's failure to deliver additional stimulus led to a 5% drop in iron ore prices to the $105 level. This is a significant development considering iron ore is a key ingredient in steelmaking, an industry that has been struggling due to a prolonged property crisis in the world's second-largest economy.

Stimulus Measures Not Enough for Base Metals

In a separate note, Hang Jiang, head of trading at Yonggang Resources Co. in Shanghai, stated that the NDRC's lack of new stimulus measures was disappointing. He added that the current stimulus from China is unlikely to significantly turn around the fortunes of base metals. Jiang emphasized the need for stimulus measures to result in a real increase in consumption before significant price rallies can be expected.

Iron Ore Price Rallies Should Be Faded

Goldman's Thomas Evans had previously advised clients that any rally in iron ore prices should be treated with caution. He noted that steel overcapacity and a growing iron ore supply are the two biggest challenges for the ferrous supply chain, issues that won't be resolved in the near future. Evans suggested that the key indicator to watch is the extent and timing of iron ore production cuts from junior miners to rebalance the market.

Broader Metal Markets Also Affected

In the broader metal markets, aluminum, zinc, nickel, lead, and tin fell by more than 2%. Bloomberg noted that the seaborne market for the steelmaking staple appears to be oversupplied. Unless China's mills start producing more steel and the country's property crisis is effectively addressed, this situation is likely to persist.

Fading Iron Ore Rallies

Given these developments, it appears that fading iron ore rallies is a prudent strategy.

Bottom Line

The lack of additional stimulus measures from China's NDRC has caused significant market turmoil, particularly in the metal markets. Iron ore prices have taken a hit, validating Goldman analysts' advice to be cautious about iron ore rallies. This development underscores the importance of closely watching global economic policies and their impact on various market sectors. How do you think these developments will shape the future of the metal markets? Share your thoughts and discuss this article with your friends. Don't forget to sign up for the Daily Briefing, delivered every day at 6pm.