Ground Breakers: Chinese steelmakers are back in full swing, but virus threat still looms for metals

Mass testing and lockdown in Shanghai district has market on edge as metals fall
China’s official steel industry monitor the CISA says steel was produced at an astonishing rate of 3.17Mt/day at the end of May
Terracom flags size of FY22 dividend after major investors converts US$20m convertible bond to equity

A fresh and unexpected lockdown in Shanghai has delivered a savage blow to ASX mining stocks, just as the commodities complex was preparing for a sweet round of Chinese government stimulus to kick in.

The major miners all tumbled in morning trade, sending the materials index falling 2.5%, with energy stocks even worse off at a 2.57% loss.

The big iron ore miners all suffered the brunt of the sell-off, with Fortescue Metals Group (ASX:FMG) down 4.27%, Rio Tinto (ASX:RIO) down 3.12%, Mineral Resources (ASX:MIN) off 2.87% and 1.77% lopped off BHP (ASX:BHP).

Iron ore prices retreated below US$140/t overnight after several days of promising gains, with both Covid and steel mill profitability a concern.

Other commodities were similarly bruised.

Copper fell 1.2% to US$9615/t while nickel dropped 2.9% to US$28,023/t, with zinc, aluminium, platinum group elements and gold all retreating.

A perfect storm for a market meltdown, with diversified miner South32 (ASX:S32) 4.79% skinnier and rare earths miner Lynas (ASX:LYC) off a startling 8.03% as stocks exposed to the China market looked pale and NdPr prices halted a fortnight long upswing.

Ground Breakers share price today:

Steel production improving

At the same time late May activity in the Middle Kingdom has boosted the outlook for iron ore exporters, with early figures from industry surveys showing steel mill output has crept back to levels only seen this time last year, when prices for iron ore skyrocketed to US$230/t and beyond.

A survey of members of the China Iron and Steel Association released this week showed steel production had reached 2.32Mt/day in the last 11 days of May, or an estimated 3.17Mt/day across the industry.

It followed a MySteel survey from earlier this month that estimated a 2.96Mt/day production rate for the final days of May.

Those figures would place China in and around the record 3.2Mt/day production rate hit in mid-2021, when the industry threatened to hit an annual rate of almost 1.2Bt.

There could be a note of caution in those figures.

With production running so high, the risk that China could restrain steel production through the second half of 2022 increases, something that would hit demand for iron ore.

Chinese authorities have already stated their desire to keep steel production levels below 2021’s 1.03Bt, itself the first drop in output in six years.

Terracom plans 10c a share dividend

Revitalised coal miner Terracom (ASX:TER) could deliver as much as 10c a share into investors’ pockets after announcing it expects to deliver $224 million in quarterly EBITDA for June.

Coming at a time of record coal prices, Terracom has managed to pay off a $167 million Euroclear bond in under a year after a refinancing in 2021, and will generate an additional $27 million in cashflow after convertible noteholder OCP Asia agreed to convert its note in the US$20m bond to shares at 69.6c a piece.

That will give the investor a ~5% stake in the Queensland and South African coal miner.

The run in coal prices means Terracom expects to generate $180m in EBITDA at its 2.3Mt Blair Athol mine in the June quarter, the same number as the nine months before it.

“The Board looks forward to being able to recommence dividends to shareholders following strong financial performance continuing to be achieved,” executive chairman Craig Ransley said.

“Based on forecast, the first dividend to be returned to shareholders is expected to be declared for the period ending 30 June 2022 and estimated to be paid during September 2022. The dividend is forecast to be an initial unfranked dividend of 10 cents per share.”

Terracom shares are up 305% year to date to 81c.