Letter From Shanghai No 913 - An Ephemeral Sentiment

On Monday's 3 pm-close, DCE Iron Ore Sept hit limit down at RMB 746, which is down 11% on the day. It then reopened at 9 pm on Monday evening, which is officially the new trading day, effectively trading for Tuesday with a “new” limit down threshold, RMB 688. The price went lower for a while (728.5), then closed at midnight around the previous closing level at RMB 748.

I mention this, as those outside of China cannot imagine the level of panic that has gripped the Chinese steel market. As steel indicates the strength of the internal “construction” marketplace, then iron ore occupies a special place as a barometer of the Chinese economy. It would seem traders have been completely wrong-footed in anticipating a surge in post-lockdown infrastructure and stimulus-driven building demand for steel that simply has not emerged. Therefore, concerned that current steel stocks are ample to supply current demand, steel producers are desperate to liquidate their inbound iron ore cargoes. Well, you may say, such are the vicissitudes of trading, but, perhaps there is something deeper on show.??

Why does demand taste so weak? Indeed, if demand is a dumpling and Beijing is the chef, which ingredient is missing?

And here I would like to revisit China’s NBS Consumer Sentiment Survey that was published at the start of June. In data for April, consumer sentiment slumped to 86.7 from 113.2 in March. In context, in its fall below the neutrality of 100 that separates optimism and pessimism, April’s number was the weakest level since the data was first published in 1991. Further, the drop of 26.5 points from March to April is also the sharpest fall on record. May’s data should become available towards the end of this month, but with rolling Covid testing, on-off Covid restrictions and a job market that is far less than buoyant, it would take an optimist of gargantuan proportions to expect a significant uptick.

Here in Shanghai, the ferry is once again chugging forward and backwards across the river, the nose-to-tail 8 am rush hour traffic jam has returned, and the high-rise cranes swish in circles as builders swarm the nearby tower block. But what are these workers thinking? Are they optimistic about the future???

Confidence is such an ephemeral sentiment.

Have a good day,

John