For the first time since 2012, the Chinese government is lowering interest rates as it struggles with a slowing economy. This could bring some relief to Australian miners feeling the pinch from depressed iron ore prices.
Having 7% GDP growth would still be an enviable position for many of the developed countries. However, with a high population and an economy that is transitioning to be more consumer driven, China slipping below 7.5% sets off warning alarms. The fear is that many businesses and local governments may not be able to make loan repayments with high rates.
Now that the Chinese government has officially cut rates, this will probably be only the first in a cycle of cuts.
Lower rates will also benefit the housing market there, which may create more demand for steel and other housing materials like copper. The market quickly ran with this news, driving up iron ore miners today.
Fortescue Metals Group Limited (ASX: FMG) is the frontrunner with shares up about 9.6% in morning trade. Junior miners like BC Iron Limited (ASX: BCI) and Arrium Ltd (ASX: ARI) are up sharply as well, 6.25% and 9.37% respectively.
Meanwhile, mining giants BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) both have jumped up around 4% on a better potential outlook.
The mini mining boom in 2010 – 2011 was created by China's heavy investing in development in 2009. Could this change in interest rates be calling the bottom of the mining cycle?
I think it is much too early to tell. Today's share price gains can quickly be reversed, so I wouldn't be rushing in to any iron ore miner position. The best sign to look for is increased iron ore imports into China. That will immediately impact iron ore prices at Chinese ports. If that doesn't materialise, neither will a mining recovery.
Traders may play the bottom prices, but long-term investors need to be more business like. If there is a strong show of Chinese demand for iron ore and the miners are still relatively cheap, then that's the time to move.
Any earlier and you will be playing the commodities game, which is still trending down for many materials.
