No Bailout For Chinese Real Estate Developers Spells Trouble For Iron Ore Prices

Iron ore prices continue to plummet as Chinese demand disappoints, leading to an increase in inventories. The steelmaking material has experienced a nearly 25% decline from its peak in early January, reflecting the ongoing challenges faced by China’s real estate and manufacturing sectors.

After a predicted year-end rally, the price completely reversed, nearing $110/ton, a level not seen since August.

The supply side is strong, with major iron ore producers, including Vale SA VALE, Rio Tinto Ltd. RTNTF, BHP Group Ltd BHP, and Fortescue Ltd. FSUMF achieving 1.12 billion metric tons in 2023 — an increase of 1.7% in 2023 compared to the year before. Most producers raised production and shipment guidance for this year, contributing to further price pressure.

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The National People’s Congress in Beijing offered little hope for a demand boost. Construction activity, a crucial driver for steel demand, remains sluggish due to China’s prolonged crackdown on property debt. The lack of significant infrastructure stimulus further hinders the revival of economic growth.

“For real estate companies that are seriously insolvent and have lost the ability to operate, those that must go bankrupt should go bankrupt, or be restructured, in accordance with the law and market principles,” said Ni Hong, Minister of Housing and Urban-Rural Development, according to CNBC's translation.

“Those who commit acts that harm the interests of the masses will be resolutely investigated and punished in accordance with the law,” he added.

Ni's words echo the prolonged Chinese struggle with the real estate market.

As early as 2020, Bejing started cracking down on developer's appetite for debt. The regulators included set limits of a liability-to-asset ratio of maximally 70%, a net gearing ratio of less than 100%, and a cash-to-short-term debt ratio of more than 1x. Those rules were forced deleveraging, which didn't fare well for companies that continuously sold the debt to purchase land development rights and relied on an appreciating market.

Nowadays, the emphasis on a “new model of real estate development” aimed at increasing affordable housing indicates a strategic shift, but few details have been provided. This approach suggests the property sector may continue to impede overall growth, influencing demand for industrial metals.

Furthermore, ING Research highlights the rising iron ore inventories at major Chinese ports, reaching the highest level since April 2023. Despite a notable 8.1% increase in iron ore imports in the first two months of the year, domestic demand growth may prove insufficient to absorb the excess supply, keeping inventories at multi-month highs.

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