China's National Congress was held last month, and we have been following this closely to understand the implications for Australian stocks. It has highlighted the potential for continued uncertainty in steel demand, and, therefore, the iron ore market.
President Xi’s speech focused on the long-term policy direction to achieve socialist modernisation by 2035, with little reference to short-term measures to boost an ailing economy, outside of claiming the zero Covid policy had been successful and saved lives. This did little to boost confidence that stimulus measures of credit availability, and less restrictive property ownership guidelines, would rescue the property sector.
This is what has weighed on steel demand and production. Property demand makes up >25% of steel demand and, with building starts down almost 40% year on year through August 2022, there are no signs of recovery.
Building starts and steel demand
Source: Martin Currie Australia, Bloomberg; as of 31 August 2022.
Furthermore, Xi’s reiteration that “housing is for living, not for speculation”, has been a consistent message of the past few years. This suggests that their growth and modernisation focus is on themes other than property. These include innovation & technology, decarbonisation & green development, national security & social stability, and the aging population challenge.
Looking forward, we see growth in iron ore supply, particularly out of Australia, Brazil and Africa, exceeding growth in Chinese demand thereby pushing the iron ore market into surplus and impacting price.
Seaborne iron ore supply and demand vs. the iron ore price
Source: Martin Currie Australia, Bloomberg; as of 31 August 2022.
Therefore, we are continuing to hold an underweight exposure to iron ore in our Value Equity portfolios.
Regulatory information and risk warnings
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’), authorised and regulated by the Financial Conduct Authority. It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
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Risk warnings - Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document.
- Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
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- Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile.
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