Chinese iron ore futures are up almost 10% in the past three trading sessions, rebounding strongly from multi-month lows in August. This has sent ASX 200 miners BHP Group Ltd (ASX: BHP) up 4.50%, Fortescue Mining Group Limited (ASX: FMG) up 5.50% and Rio Tinto Limited (ASX: RIO) up 4.75% in the past five sessions. But is this simply a 'dead cat bounce', or are iron ore fundamentals showing signs of improvement?
The iron ore outlook
China's manufacturing index came in at 50.4 points for August, compared to expectations of 49.8 points. Any score over 50 indicates an expansion, figures below that signal a contraction, so this strong result may provide a boost in sentiment despite export sales falling amid the country's escalating trade war with the United States (US).
China is also focusing on its infrastructure sector in response to its slower domestic economic growth and rising trade tensions. However, it needs to find a balance between increasing steel production and the possibility of oversupply and short-term losses for steel mills. While China's steel output is near its highs, steel producers will be ordered to reduce their utilisation rates around late September to early October to ensure clearer skies before its National Day holiday. Overall, China is giving mixed short-term signals and the trade war adds to that uncertainty.
Additionally, in late August, Vale SA announced that it had to temporarily halt operations at the Viga concentration plant due to a permit problem. The impact of the delay is significant and affects approximately 330,000 tonnes of production per month. This could be one of the reasons why iron ore is running higher in the past few trading sessions. However, looking beyond recent events, iron ore supply will continue to grow modestly, primarily driven by Brazil and India.
Is there a short-term opportunity?
The markets will continue to be rattled by the US–China trade war escalation, and it appears as though any optimism about a trade agreement is becoming increasingly short-lived as both countries ramp up tariffs against each other. This back and forth will most likely have the markets' range bound until a meaningful catalyst emerges that gives the market some real direction.
Iron ore supply may have taken a small hit in the short-term, but supply will ultimately return to form and grow modestly. China will also curb its steel production, particularly inefficient and non-compliant producers that emit excess pollution. Conversely, China's infrastructure expansion may continue to fuel its demand for steel, to ensure it can maintain steel output at a reasonable level. Overall, there is too much short-term volatility and geopolitical noise for meaningful gains for iron ore producers.
Foolish takeaway
I believe investors best sit on their hands and wait for more concrete news that will provide ASX iron ore miners and the general market with a better indication of where things are headed.
