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Iron ore shows strength in face of trade wars, market trepidation

A broad rout hit markets in the week ending Oct. 12 as rising interest rates and fraught trade relations between two of the world's largest economies weighed on investors.

Emerging markets saw US$7.3 billion in portfolio outflows in early October, according to an analysis by the Institute of International Finance. U.S. markets retreated, posting hefty declines during the week. The S&P 500 fell for six consecutive days, its worst performance since November 2016 in terms of consecutive down days, according to reports.

It reversed course Oct. 12, with modest gains to end the week.

The losses were widely attributed to rising interest rates, which can increase corporate borrowing costs and draw money away from equities.

Possible trade talks between U.S. President Donald Trump and Chinese President Xi Jinping were reportedly still the works, although Trump continues to talk tough about more tariffs.

Price ring

Iron ore gained 2% over the week to US$67.4/t. Metallurgical coal, a key steelmaking ingredient, followed suit, up 1.6% to US$218.7/t.

In base metals, copper showed strength, increasing 2.5% to US$6,319/t. Aluminum dropped 4.4% to US$2,045/t.

Nickel was close to even, ticking up 0.3% to US$12,579/t. Zinc gained as much, percentage-wise, to close the week at US$2,676/t, while lead climbed 3.3% to US$2,037/t.

Precious metals were a mixed bag. Platinum gained 1.9% to US$838/oz. Palladium and rhodium fell 0.4% and 2.5% to US$1,068/oz and US$2,515/oz, respectively.

Gold climbed 1.1% to US$1,217/oz, while silver declined 0.4% to US$14.6/oz.

Talking points

J.P. Morgan Cazenove analysts see tightness in the iron ore market sticking around for the rest of the year.

In an Oct. 11 note, the analysts noted iron ore prices made gains in recent months despite fears of slowing economic growth. The pricing strength extended to lower-quality grades of iron ore.

"In our view, strong iron ore prices reflect tight fundamentals," the analysts said.

Majors have increased their supply of iron ore, but strong demand has allowed more marginal supply to fill the gap.

"As a result, Chinese domestic supply has risen to fill the void, trending around ~280Mtpa (62% Fe equivalent) over the past 3 months," the analysts said. "This is the highest run rate since 2015."

The analysts held fast to their US$65/t forecast for the fourth quarter but noted the spot price was trading higher, "highlighting upside risks."

Financings

Among larger debt and equity financings, Zijin Mining Group Co. Ltd. said it plans to run a 4.5 billion Chinese yuan debt offering to boost cash on hand.

Zhaojin Mining Industry Co. Ltd. may raise 1.5 billion Chinese yuan through 10-year corporate bonds that were proposed by controlling shareholder Shandong Zhaojin Group Co. Ltd.

A 50%-owned subsidiary of Golden Queen Mining Co. Ltd. secured a US$20 million credit facility that bears interest at 8%.

Fortescue Metals Group Ltd. said it will launch a share buyback for up to A$500 million. The iron ore miner said the buyback would be funded through cash flows, and its scope will depend on market conditions.

Wolf Minerals Ltd.'s cash woes continue. It appointed administrators after funding talks failed.

Kin Mining NL plans to do a rights offering to raise A$10.4 million with the backing of some of its key shareholders. Kin Mining said it will use some of the proceeds to pay back a US$3 million debt.

Stelco Holdings Inc. raised C$16.5 million after investors partially exercised rights in a secondary offering priced at C$22.65 per share.

White Energy Co. Ltd. said it aims to raise A$23 million in an entitlement offer, issuing shares at 7 Australian cents apiece. Proceeds will help back White Energy's legal dispute over coal assets in Indonesia.