After a significant price correction in China exposed stocks over the last year, Tyndall’s Jason Kim recently went to China and met with various companies and industry experts to help determine whether some of these stocks now represent a real opportunity for investors.
During the course of 2024, Australia’s largest trading partner, China, went through a significant economic downturn on the back of a residential property downturn after a weak COVID bounce when China came out of lockdown in late 2022.
This resulted in poor consumer sentiment, which then spiraled into a negative feedback loop with business confidence which became more pronounced during 2024. This not only impacted the broader share market, but more specifically, it directly impacted resource stocks and those companies with significant exposure to Chinese consumers.
Over several days in March, meetings were held with macro experts, steel mills, property developers, lithium miners, and EV battery makers across cities including Beijing, Shanghai, Shenzhen, Guangzhou, Chengdu, Changsha, and Tangshan.
Key takeaways
After facing soft demand, and deflation in China during 2024, the general view for the Chinese economy was that 2024 saw the low point for the economy, and that 2025 is likely to see some improvement. Overall demand growth is at least going to improve to be marginally negative to flat, and it is possible that we see a very modest recovery.
Residential property prices in tier 1 and 2 cities are now starting to show some signs of stabilisation, post-September policy support, and arguably there may now be some green shoots. However, property prices in the lower tier cities are still weak, resulting in consumer sentiment still remaining fragile.
Given the focus on improving consumer sentiment, it appears most likely that any Chinese government stimulus will be targeted more at the consumer rather than in construction/fixed asset investment, and that measures will be taken to help stabilise – rather than stimulate – residential property prices. This clearly has negative implications for steel and iron ore.
The key risks are US tariffs and geopolitical tensions which remain a significant wildcard impacting exports and overall sentiment. However, many experts noted that the Chinese government may have been holding back some stimulus to leave enough fire power to properly address the negative implications from the US tariffs.
Key Investment Outlook
Iron Ore
China produces approximately 1 billion tonnes of steel per annum. Due to a weak Chinese economy last year, we saw softer demand for steel domestically and an increase in steel exports to c100kt pa to shift excess production. This has seen steel profit margins decline.
After meeting many steel mills, iron ore traders, and steel traders, the consensus view is that domestic steel demand still remains soft, with property and infrastructure seeing a modest contraction in demand. The key bright spots for demand are in the consumer related sectors – namely auto and appliances – after some recent consumer stimulus sought to increase demand in those industries. This view is in-line with what was discussed previously.
China has increasingly imposed stricter and more frequent air pollution controls, requiring the steel mills to reduce production to reduce emissions, and this may be the mechanism that the authorities will use to help reduce oversupply. There is speculation that a government mandated production cut of 50 million tonnes per annum is imminent.
All the steel mills we spoke to were generally supportive of industry-wide production cuts as it would improve their profitability, but this will come at the expense of less demand for iron ore.
As a result, demand for iron ore from China is likely to be challenging, while at the same time meaningful new supply of iron ore (namely Simandou in Guinea) ramps up over the next 12 months or so. While the market is already forecasting lower long-term iron ore prices, any falls in spot iron ore prices in the short term will likely dampen sentiment in this sector.
Lithium
An incredible surge in lithium prices in 2021 and 2022 – peaking at around $US80,000 in Dec 2022 – saw a swathe of new lithium supply come to market, which perhaps unsurprisingly was followed by a spectacular decline in prices (refer Figure 1).
Figure 1: The Lithium Rollercoaster
Source: Bloomberg, April 2025.
After having met many Chinese lithium miners and lithium battery makers, it appears that even after this significant price correction the outlook for lithium prices still remains challenged.
Despite growing demand for lithium as we transition to renewables and EVs globally, the expected growth in supply flagged by the lithium miners we met would suggest that any demand growth will at least be met by supply growth into the medium term.
Portfolio Implications
Given the near-term challenges for iron ore, we have moderated our overweight position in the iron ore miners to be marginally overweight. This acknowledges that any stimulus from China, while likely to be more targeted at the consumer, could still be incrementally positive for mining stocks. Our key overweight in this sector is Rio Tinto due to its strong forecast free cash flows, and participation in the Simandou project which will be a source of meaningful growth in iron-ore supply in the near future.
While lithium miners may appear attractive at current share prices, our trip suggests it is likely too early to enter this space given the challenging oversupply outlook. We continue to monitor this sector closely for any potential opportunities.
