As we enter the Year of the Pig in the Chinese calendar, the performance of iron ore has been, well, piggish of late. Coal and iron ore are the two key ingredients in the production of steel in the Bessemer process. As popular as Alibaba, Tencent’s WeChat, iQiyi and countless other Chinese apps may be, steel production is still the best determinant of the health of the Chinese economy.
Chinese government estimates place 2018 steel output at 923 million tonnes, an 11% increase over 2017’s figure. October’s output of 82.552 million tonnes reflected an all-time record for the Chinese economy.
So, all those out-of-context, sentiment-based data points that seem to be showing a slowdown in the Chinese economy–PMI data for example–really are giving a false positive for the all-important “China’s economy is slowing” narrative that so many market observers in the U.S. love to push.
Structural inflation can be a hindrance to economic growth, of course, and that’s where the recent spike in iron ore prices comes in. The catalyst for this move in iron ore prices, unfortunately, was the breach of the dam at Vale’s Córrego de Feijão mine in Brumadinho in Minas Gerais state in Brazil.
This disaster has obviously taken an enormous human toll–at least 60 fatalities–but coming so soon after the 2015 dam collapse at the Samarco mine–a joint venture between Vale and BHP Billiton–this has brought the safety of the entire Brazilian mining industry into question.