What does the rebound in China’s PMI mean for iron ore?

China’s manufacturing purchasing managers’ index (PMI) rebounded in June, indicating expansion for the first time since February as major cities gradually reopen from the Covid-19 lockdowns.

The index rose to 50.2 in June from 49.6 in May, a tick lower than the expected 50.5, according to Trading Economics. A PMI reading above 50 represents growth and a reading below represents a contraction.

The figures provided the much-needed optimism for investors with shares on China’s Shanghai Composite, which rose almost 2 per cent on the news.

However, what is of interest is what this could mean for iron ore.

The price of iron ore is set to round off the quarter with a fall of 9.3 per cent from April to June. At the time of writing, the price has fallen from US$136.09 to US$124.50.

While the gradual emergence from lockdowns provides the prospect of improved activity, there’s a buffer of steel products to accommodate any uptick in consumption. According to SMM Information & Technology Co, iron ore supply has picked up while the demand for iron ore has contracted, partially due to blast furnace maintenance issues. This has resulted in an imbalance between supply and demand. At the same time, leading miners in Australia and Brazil have continued with production.

If you look underneath the headline figures, there are some weaker numbers. New orders rose to 50.4 from 48.2 in May while export orders still remained in contraction territory, rising to 49.5 from 46.2 in May.

This could be a sign that iron ore could face a challenging quarter. However, President Xi Jinping has pledged to provide support to the economy. With an ambitious annual GDP target of 5.5 per cent, and given that GDP is currently sitting at 4.8 per cent, the headwinds for iron ore might not be so challenging.
 
Sources: Bloomberg, Trading Economics, DCE