China slowdown and strong dollar signal end of 'Iron Age'

"The August data suggests that the government could not afford to rest on its laurels with regard to supporting economic growth," wrote Larry Hu, Macquarie Group's China economist.

"Beijing pushed up growth to 7.5pc in 2Q with a flurry of stimulus in April and May. But growth momentum eased quickly entering 3Q as the stimulus effects waned. As such, we expect more stimulus measures to be rolled out in the coming weeks, likely in the areas of railway, social housing, urban infrastructure, environmental protection and water projects. Moreover, with suppressed shadow banking activities, the PBoC might ramp up monthly bank loans in Sep to boost credit supply, as was the case this May and June."

Regardless of what additional measures China takes to boost growth, iron ore markets are also being squeezed by the increasing volumes of ore that the big mining giants such as BHP Billiton, Rio Tinto and Vale are shipping. If supply tightens any reduction is likely to come from smaller mining companies. Rio Tinto's chief executive Sam Walsh told Reuters recently that he expects 125m tonnes of supply, equal to about 10pc of world demand, to be pulled off the market by the end of the year.

Meanwhile, prices for industrial metals such as iron ore and copper are also being pressured by the strengthening US dollar as the Federal Reserve reins in its bond – buying.

According to research from Macquarie: "The US dollar is gaining partly as it is looking more attractive, thanks to a healthier US economy and more hawkish Fed, and partly because other currencies are looking less attractive, due to slower growth and more dovish central banks.

"This, as normal, is putting pressure on metal prices in dollars, though the large share of supply and demand in many metals accounted for by the dollar area lessens the impact, and in some cases other factors have been sufficient to outweigh the dollar move. When metal prices are measured in other currencies the stronger dollar does not seem to have a significant negative impact, suggesting the bearish impact is more mechanical than fundamental, though real enough for dollar – based investors."

However, given the twin forces now bearing down on industrial metals, investors in both the mining sector and physical commodities should be adjusting their portfolios for the possible end of the Iron Age.

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