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Can Iron Ore Maintain Its Price Momentum amid China’s Slowdown?

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China’s manufacturing growth slows

China’s manufacturing growth in October was at its weakest level in over two years. Its official manufacturing PMI (purchasing managers’ index) came in at 50.2 compared to economists’ expectation of 50.6. The figure was also lower than its September reading of 50.8.

The PMI reading for China was the lowest since July 2016. New export orders contracted for the fifth consecutive month in October. A PMI reading of above 50 indicates expansion, while a reading of below 50 indicates contraction.

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China’s slowdown and the trade war

As the trade war between the United States (SPY) (VTI) and China (FXI) continues to escalate, China’s growth prospects are expected to be more affected than those of the United States. Another factor affecting China’s PMI in October could be the national public holidays during the month. China has also reported a string of weaker economic data in the past few days.

China and iron ore prices

China is the largest consumer of the seaborne iron ore, contributing to more than 70% of seaborne iron ore consumption. While seaborne iron ore prices (XME) have stood their ground amid weakening Chinese growth due to higher demand for imported, high-quality ore to cut down on pollution, the latest set of data weighed on iron ore prices. After hitting a seven-month high on October 29, prices were down for two consecutive days.

Firm iron ore prices have kept iron ore production going at top producers, including Vale SA (VALE), Rio Tinto (RIO), and BHP Billiton (BHP). These three companies produce close to half of the total iron ore produced globally. In contrast to the fates of other metals (DBB), the price of iron ore has kept the pace despite the apparent slowdown in China, which is most likely the result of import substitution.

However, as China continues to slow down and iron ore supplies continue to ramp up, whether prices will be able to maintain their upward trajectory remains uncertain.

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