Monsters of Rock: UBS sees tough times ahead for iron ore miners and how's that for a Friday pick me up?

Iron ore and gold miners lift the ASX materials sector at the end of a topsy turvy week
China’s latest economic news delivers mixed bag for bulk miners
UBS thinks iron ore is in for a tough run ahead of big Communist Party meeting in October

Iron ore miners have made solid gains this week, with Rio Tinto (ASX:RIO), BHP (ASX:BHP) and Fortescue Metals Group (ASX:FMG) all consolidating on the back of consolidation in iron ore prices, which seem to have found a floor around US$95/t and are holding steady in the US$95-100/t range.

Singapore futures were up again today, with strong performances from the big iron ore players leading the materials sector to a 0.67% gain today amidst a weak ASX 200 result of -1.23%.

They were assisted by gold miners, with bellwethers like Northern Star (ASX:NST), Newcrest (ASX:NCM), Evolution (ASX:EVN) and mid-tiers Capricorn (ASX:CMM), Silver Lake (ASX:SLR) and Regis Resources (ASX:RRL) all finding favour as gold rose for a second straight day, now fetching US$1666/oz.

“The risks are still to the downside, but right now it seems gold has major support ahead of the $1600 level,” OANDA’s Edward Moya said.

As for iron ore, a fair amount of support has come from expectations (yet again) that China will prop up its ailing construction sector, warn down this year by Covid and sinking property developers.

“A meeting chaired by Premier Li Keqiang reaffirmed the government’s plan to front-load next year’s special government bond quota,” ANZ senior economist Adelaide Timbrell said in a note today.

“The PBoC will also allow some cities to cut mortgage rates for first home buyers. Investors hope this will result in a boost to construction-related steel demand.”

China’s PMIs today weren’t so rosy though, with the combination of the official and Caixin survey (the latter regarded as more reliable due to its non-State nature) fell from 49.4 to 49.1.

The weaker of the two was the independent Caixin survey of small businesses, with the composite PMI — down from 51.7 t 50.9 — pointing to a “loss in overall economic momentum in September” according to Capital Economics.

UBS down on iron ore

Iron ore prices and demand has been steady heading into China’s week long national day festivities, which begin tomorrow.

Typically this is a period of restocking, with business activity expected to wind down over the coming week.

Steel PMIs were up slightly by 0.5 points to 46.6, according to MySteel, but Dalian futures up for most of the day still fell flat in the afternoon session.

UBS meanwhile has called the recovery in demand seen in recent weeks short-lived in a note this week, warning also that Rio Tinto was at risk of falling to the lower end of its production guidance, with the investment bank expecting the Pilbara giants exports to be down 1% YoY in the September quarter.

Rio, which has struggled to make guidance in recent years, typically does its sprinting in the last three months of the year given it reports on a calendar year basis.

UBS thinks demand was being driven by restocking, and flagged the potential for environmental shutdowns of steel mills ahead of the Communist Party national congress on October 16 in Beijing.