-Clyde Russell is a Reuters columnist. The views expressed are his own.-
By Clyde Russell
LAUNCESTON, Australia, April 2 (Reuters) - China takes steps to stimulate its vast housing sector and the manufacturing index surprises on the upside, and yet iron ore slips to another record low.
It used to be part of the conventional wisdom that the provision of stimulus by the authorities or signs of growth in the factory sector would boost demand for iron ore, and hence lift prices.
But the nexus between the stimulus/growth story and iron ore prices appears to have broken down completely.
The People’s Bank of China on March 30 cut downpayment requirements for buyers of second homes, while the Ministry of Finance said individuals selling an ordinary house were exempt from business taxes if they had owned it for more than two years. Sellers were previously exempted from taxes only if they owned the houses for at least five years.
The policy sweeteners, viewed as more generous than the market had expected, are aimed at reviving the country’s flagging property sector, which accounts for about 40 percent of the nation’s steel demand.
The official Purchasing Managers’ Index (PMI) edged up to 50.1 in March, from February’s 49.9 and above the media forecast of 49.7 predicted in a Reuters poll of analysts.
While only barely above the 50-level that separates growth from contraction on a monthly basis, the rise in the index into positive territory has been one of the few recent signs of strength in the Chinese economy.
The HSBC/Markit PMI, which focuses more on smaller-sized businesses, remained in negative territory in March, coming in at 49.6, but even this was above the preliminary 49.2 reading.
In times past, a mildly positive PMI reading, policy measures to boost housing and a backdrop of falling interest rates would have been enough to spark some optimism in the steel sector, which would have filtered through to iron ore.
But Asian spot iron ore .IO62-CNI=SI dropped to an all-time low of $49 a tonne on Wednesday, bringing the loss so far this year to 31 percent.
Iron ore futures traded at record lows as well, with the benchmark September contract on the Dalian Commodity Exchange dropping to 381 yuan ($63.74) a tonne on Thursday.
The futures curve <0#DCIO:> also holds out little hope for a recovery in price, being virtually flat for the next 12 months, although this is a slight improvement from a month ago, when the curve was backwardated.
It is easy to point to the rapid growth in iron ore supply as the major reason that Chinese policy stimulus is failing to boost prices.
Much of the boost to supply has come from the three major producers in Western Australia state, Rio Tinto, BHP Billiton <BHP.AX. and Fortescue Metals Group. They have added some 234 million tonnes of capacity in the past two years and plan to add another 196 million tonnes by 2020.
This wave of supply will be further boosted by the number one global producer, Brazil’s Vale, which also intends to boost output in the coming years.
What has become increasingly clear is that China, which buys about two-thirds of seaborne iron ore, can’t absorb all of the new output. It won’t be able to buy it all even if all the domestic mines shut down and every global supplier outside the big four stopped producing.
The best hope for Vale and the big three Australian miners is that demand increases as much as they hope it will.
It thus becomes key that the stimulus measures enacted by China actually revive the property sector, and the wider economy, rather than merely keeping it from falling any harder.
This is by no means certain, and for as long as the outlook for the Chinese economy remains cloudy, the likelihood increases that iron ore prices will continue heading lower. (Editing by Himani Sarkar)