The ASX is again in the green, with the ASX 200 hitting a five-week high. The S&P/ASX200 gained 78.50 points or 1.09% to 7,273.80 and setting a new 20-day high.
Over the last five days, the index has gained 2.98%, but is down 2.22% for the last 52 weeks.
The top-performing stocks in this index are Liointown Resources Ltd and Pilbara Minerals Ltd (ASX:PLS) up 4.67%and 4.15% respectively.
Overall, Australia had a good day economically. As well as positive investor sentiment, the country’s trade surplus came in hotter than expected after it topped $13.2 billion in November – more than the $11.3 billion expected by the market.
Australian Bureau of Statistics (ABS) data shows the trade surplus for the month was $458 million higher than in October.
Imports pulled back from record highs and offset a dip in liquefied natural gas exports. LNG slid 3.3%.
Iron ore and coal exports increased in demand, even though demand for iron ore from China was lower in November. It was offset by strong growth in the Japanese market.
The surplus on goods and services rose to $13.2 billion, from October's $12.7 billion, well above forecasts of $10.5 billion.
Key statistics
- The seasonally adjusted balance on goods and services surplus increased $458 million in November.
- Goods and services debits (imports) fell $683 million (1.5%) driven by freight transport.
- Goods and services credits (exports) fell $225 million (0.4%) driven by other mineral fuels.
China’s iron ore strategy
Price volatility in iron ore is likely to decline along with China's centralised iron ore buying. However, according to Morgan Stanley (NYSE:MS), it is unlikely to impact the through-cycle average.
Morgan Stanley (NYSE:MS) told investors that iron ore was on a "remarkable run" at $US122/tonne, up 53% since the start of November.
"This rally appears mostly forward-looking on China reopening optimism, as underlying supply-demand fundamentals haven't significantly tightened up," Morgan Stanley (NYSE:MS) commodities strategist Marius van Straaten said.
Although China’s steel production slid into the year’s end, Australian and Brazilian shipments were up 8% in December on a month-to-month basis.
That led Morgan Stanley to forecast "further upside in iron ore prices". It has forecast an average price of $US140/tonne for the second quarter of 2023.
China’s plans to centralise its iron ore buying is expected to reduce the price volatility, Australia’s biggest market has faced since the introduction of spot pricing more than ten years ago.
BHP (ASX:BHP) Group has benefitted recently.
On Wednesday, its shares closed up 1.5% to $48.51 after hitting a record intraday high of $48.93. It is up 1.57% today (Thursday).
Its previous record high of $48.57 was achieved in July 2021. At that time, the spot price of 62% iron ore hit a record high of $US219.77 a tonne.
Fortescue Metals Group (ASX:ASX:FMG) Ltd is also on a high, with shares hitting an 11-month peak on Wednesday of $22.39.
Rio Tinto (ASX:RIO) Group Ltd also hit a nine-month high of $120.88.
Underlying supply-demand fundamentals of the iron ore market “haven’t significantly tightened up”, Morgan Stanley noted.
Will China’s centralised buying affect prices?
The answer seems to be no. The US bank notes that centralised buying is unlikely to lower the average price of iron ore through China’s economic cycle.
The China Mineral Resources Group (CMRG), responsible for the raw material needs of China’s steel mills, will create a unified buying platform for its steel industry. The move is in response to Beijing’s belief that iron ore is overpriced.
Rumours suggest the CMRG will start buying iron ore for China’s 20 biggest steelmakers in 2023.
“While this vehicle has gone somewhat under the radar for investors, it matters, as it will impact the power balance in the iron ore market, and we’d argue this could be the biggest market shake-up since the end of the annual contract system back in 2010,” Morgan Stanley commodity strategists said.
China is likely to require 750 million tonnes of iron ore for its top 20 steel companies.
“No surprise China is looking to pay less for its iron ore,” Morgan Stanley said while hinting that iron ore was not “structurally overpriced”.
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