Recently in China's real estate market, various "bizarre" housing sales methods have become increasingly common. Nanjing in Jiangsu province has introduced a "watermelon for housing, up to 100,000 yuan off" promotion, while Wuxi has launched a region-specific "peach against housing payment" scheme, and Henan has seen activities where garlic and wheat can be used to offset housing payments.

These unconventional methods of selling homes reflect a general lack of willingness to buy houses and insufficient transaction volumes. The lack of housing transactions, in turn, highlights the economic difficulties faced: can economic stimulus measures bring about a significant increase in economic activity?

This question is not only on the minds of real estate developers but also of large iron ore miners in Australia. As was pointed out at the beginning of the iron ore price decline, in the second quarter of this year, China was fighting the COVID-19 pandemic, which inevitably affected the economy, meaning the future of iron ore prices was uncertain.

In March, iron ore prices rose from about $110 per ton at the beginning of the year to $156. This also reflected the market's optimistic sentiment regarding China's commitment to stimulating the economy and achieving a 5.5% GDP growth target for 2022.

Advertisement

However, with the changing COVID-19 situation in Shanghai and Beijing, iron ore prices gradually fell from their highs. Although there was a brief rebound in early June, by June 20th, they plummeted by 8% to $112.35 per ton. This was due to an index reflecting Chinese steel profits, which had plummeted by nearly 90% in the first three weeks of June.

The decline in iron ore prices has also led to a noticeable drop in the stock prices of Australia's three major iron ore miners, making it difficult for them to maintain a performance stronger than the Australian stock market index ASX 200.

The profit margins of steel companies have long been a key factor in determining the direction of iron ore prices. Currently, due to steel mills' expectations that China's stimulus measures will be effective, while actual demand is lukewarm, leading to steel mills stockpiling a large amount of steel, profit margins are facing severe pressure.

So much so that there have been multiple reports stating that some steel mills are currently idling their blast furnaces and conducting planned maintenance ahead of schedule to limit losses. This also increases the downward pressure on iron ore prices.An international trader commented on the plight of steel mills, saying, "The more they produce, the more they lose." The country will certainly not cease its stimulus measures, especially in areas related to iron ore prices. The most evident is the tripling of infrastructure investment project approvals to get the relevant industries back on track.

In the real estate sector, which is estimated to account for about 40% of iron ore demand, many places are also trying to reverse the measures taken last year to crack down on developers and allow real estate sales to return to normal. It is reported that this year, about 140 cities have introduced policies to support real estate sales, including relaxing home purchase restrictions, reducing down payment ratios, allowing interest-only payments for a period, and directly providing home purchase subsidies.

However, so far, the results have not been very encouraging. Despite a sequential increase in home sales in May, which was the first for this year, the transaction volume was still down 42% compared to the same period last year. In May, new home prices fell for the ninth consecutive month, and second-hand home sales recorded the largest single-month decline since February 2015.

Just like in previous real estate downturns, residents' "precautionary" savings are increasing. At the same time, businesses are not very keen on borrowing. After all, if there is no stronger domestic demand, they have little reason to borrow for investment, and most borrowing needs are for short-term financing. Troubled real estate developers are eager to get funds, but they are not allowed to do so due to the "three red lines" regulation that restricts the debt levels of developers.

How China will escape the economic slowdown remains to be seen. Successful fiscal stimulus will also boost overall demand, especially by quickly increasing private sector credit demand. However, the recovery of steel demand may take some time. Before demand picks up, steel mill profit margins and iron ore prices may still face pressure.

Of course, investors in BHP Billiton, Rio Tinto, and Fortescue Metals Group need to consider that even at the current iron ore prices, the low-cost base of these three companies means they are still making huge profits and have the ability to pay substantial dividends. For example, BHP Billiton's cost guidance is between $17.50 and $18.50 per ton.

Against the backdrop of short-term iron ore prices still exceeding $110 per ton and long-term contract prices exceeding $60 per ton, these companies will maintain substantial profits.However, from the high point at the end of April to now, the share prices of iron ore companies have plummeted significantly, with BHP Billiton's stock price falling by nearly 13%, Rio Tinto's by 15%, and Fortescue Metals Group's (FMG) by approximately 20%.

Given the substantial impact of China's economic trends on iron ore prices, investors should exercise caution regarding these giants before further observing the extent of the effectiveness of China's stimulus plans.