China home price dip puts pressure on metals

With further signs of China’s property sector softening, it’s not a surprise to see related commodity prices under pressure. This includes the iron ore, copper, steel-related plays.

Iron Ore
Source: Bloomberg

According to the index for October, new home prices released yesterday saw prices in 69 out of 70 cities dropped from the previous month.

The drop overall was at 2.6%, double the print of September prices which indicated a dip of 1.3%. Sales volume had declined 1.3% during October.

This suggests we may still have a bit to go before the slump in prices bottom out, which could mean further pressure on sectors linked to real estate.

The property sector accounts for nearly 30% of the Chinese economy and has an impact on a range of industries spanning from construction to furniture.

Based on consensus projections for China’s growth over the next year, the market appears to be bracing for a slowdown. At the moment, expectations are for growth to come in just under 7% for 2015, which would be the slowest pace in nearly six years.

Impact on industrial metals

Amid weaker confidence over the demand outlook for copper, prices fell 1.3% and dipped back under $3/pound in late Tuesday trade. A new forecast released by Goldman Sachs yesterday also painted a gloomier picture. It cut its forecast for copper, expecting it to trade at $6,200 a tonne (some $2.80 a pound) instead of earlier estimates of $6,600 a tonne ($2.72 a pound).

Iron ore has also been under pressure and pushing a five-year low. Ore with 62% content delivered to Qingdao, China, fell 4.37% to $71.80 a dry tonne yesterday.

Traders expecting the slump to continue can also look at iron-related plays in the stock market such as Fortescue Metals. More than 90% of its revenue comes from China and any dent to the demand outlook will dampen investor sentiment on the stock.

Fortescue’s stock price dropped 6.6% on the poor Chinese property data yesterday, it’s down by over 50% over the past year. From a technical perspective on a weekly chart, the stock price looks poised to break under the support level of $2.79 and it could easily test the next potential floor at around $2.17 if the bearish momentum continues.

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