As China looks to emerge strongly from recent COVID lockdowns, Australian miners are set to welcome the economic return of their biggest export customer.
According to a new report from Ausbil Global Resources Fund, China is “likely to accelerate growth coming out of recent hard COVID lockdowns through significant stimulus”, a stark contrast from the inflationary and geopolitical pressures stalling growth in the US and Europe.
“There is a divergent story developing in the world economy, between the east and west in the current environment,” Ausbil co-portfolio managers Luke Smith and James Stewart wrote. “The US and broader western developed economies are slowing, driven by increased central bank intervention with the goal to stem surging inflation.
“China dominates demand for many natural resources, offering some insulation for commodities from the impact of slowing world growth.”
Australia’s exports to China have slowed considerably in 2022 due to China’s aggressive zero-COVID approach, which has seen hard lockdowns in various places across the country and resulted in a significantly slowed economy.
But China is looking to change that through stimulus packages, and Australian mining companies could be major beneficiaries.
“Throughout 2022 … we have seen the government setting up for more aggressive stimulus, which we expect to play out during 2H 2022,” Smith and Stewart write.
“While rolling lockdowns remain in place, the implementation of stimulus measures is likely to be somewhat constrained, but the building blocks are in place to accelerate economic activity.
“Given that China represents at least 50 per cent of commodity demand, we believe commodities are likely to benefit from Chinese stimulus which is yet to hit the ground.
“Metal markets are currently tightly balanced in terms of supply and demand, with limited excess capacity available in any commodities following an extended period of underinvestment.
“Metals inventory remains low. Although demand may soften from the west, markets are tight and any acceleration from Chinese demand should underpin prices that are already stretched due to low inventories and underinvestment in supply.”
While Australian iron ore major Rio Tinto acknowledged that industrial activity in China was plagued by COVID lockdowns in the second quarter of 2022, it did suggest there was a positive trend emerging.
Announcing its second quarter results, Rio said there had been a “more accommodative policy stance” in China to support growth, while further measures were expected to support the country’s ailing property sector.
According to Mysteel, the price for 62 per cent seaborne Australian iron ore fines at the port of Qingdao dropped below $US100 per dry metric tonne (dmt) on August 19, falling to $US99.35/dmt.