Monsters of Rock: Mining investors get speccy as stimulus hopes run the show

Chinese stimulus hopes saw miners surge today
Iron ore producers like FMG joined a ballooning gold sector as investors pray for a demand revival
Gold prices hit record highs, with the sub-index up 5.2%

Mining investors are never ones to get drunk on hope …

Unless you count pretty much every bull market, exemplified in the run inspired by the closure of a Chinese lithium mine this week.

While its 2% share of the global market is hardly insignificant, CATL’s decision to shutter its Jianxiawo ops are hardly enough to address oversupply in the EV raw materials supply chain on its own.

Short covering may explain some of the rise – the vast majority of the top shorted stocks on the ASX, led by Pilbara Minerals (ASX:PLS) at over 20%, are in battery metals.

READ: Benchmark Gigafactories APAC: UBS calls lithium bottom, sends share prices surging

But it’s not only lithium stocks being bought on rumour.

Gold miners surged today, stirred by prices which lifted to record highs as signs continue to point to rate cuts in the US.

LBMA prices closed at over US$2545/oz, eclipsing levels of ~US$2530/oz struck on August 20.

The ASX gold sub-index lifted ~5.2% in a watershed day for gold backers.

More incredible was a super run for bulks, with coal miners and iron ore companies lifting fast as Xi Jinping called for efforts to ramp up to hit China’s 5% GDP growth target.

Fortescue (ASX:FMG) shares were up ~5% as SGX iron ore prices lifted slightly to US$94.50/t over the past couple of days.

Where are we at?

At the moment the iron ore market and, for that matter, coal, is looking pretty untidy in China.

Steel demand, certainly in the domestic arena, is pretty crummy, underlined by near non-existent mill profits and real estate starts at their lowest rates since 2006, when Justin Timberlake’s Future Sex Love Sounds ruled the charts.

Not bringing sexy back is China’s steel complex, which Westpac IQ’s Justin Smirk says is pushing iron ore and coal south.

“Through August we noted that port inventories of ore surged to a fresh 29-month high while steel inventories at major mills grew to a seasonal two-year high. Chinese port stocks are up around 35Mt year to date and now back to levels, relative to steel production, last seen in 2022,” he said.

“At the same time steel mill profitability dropped to a multi-decade low in late August (despite falling met coal prices offering some offset) while blast furnace operating rates dropped to the lowest seasonal level since 2018. All these indicators suggest ongoing weakness in the demand for iron ore.

“Meanwhile, Chinese property starts dropped to the lowest level since 2006 in July and steel production was down 6%yr, with preliminary indicators for August pointing to a decline of more than 9%yr. That would leave combined July and August steel production at its lowest level since 2018.”

Westpac thinks iron ore finished 2024 at US$85/t, with the removal of marginal supply from India and lower met coal prices providing some relief from the demand wobbles.

Stimulus measures could be all but inevitable now though, if China is to hit its 5% GDP growth target.

“Without additional stimulus, the GDP figure will likely fall below our current forecast of 4.9%,” ANZ’s Raymond Yeung and Zhaopeng Xing said.

“August’s industrial production, retail sales and fixed asset investment will likely register 4.7% y/y, 2.3% and 3.4%, respectively, well below the 5% growth target. Pending September’s performance, Q3 GDP would be as low as 4.5%.”

They think the Chinese Government could step in to shore up confidence in asset prices, setting up a national stability fund and cutting loan and mortgage rates with cash-strapped local governments unable to lift the economy by proxy.

“We believe the government is mulling the release of a stimulus package to improve household income through tax cut and mortgage rate cut. An income package of at least CNY2trn will be necessary to generate CNY700bn spending, equivalent to 0.56% of GDP,” Yeung and Xing said.

The ASX materials sector ended the day up 2.25%, a 4.17% weekly gain, with energy up 0.84% and 1.86% respectively.