The rally in iron ore may have ended as its prices have dropped by over 65 per cent since the peak witnessed in May this year on weak industrial demand, mainly in China where steel production is facing curbs. Since last week, the rates have declined by about five per cent.

The collapse has led to rating agencies such as Fitch Solutions Country Risk and Industry Research (FSCRIF) downgrading iron ore outlook for this year as well as the next.

17-month low

Iron ore with 63.5 per cent iron content was quoted at $87.50 a tonne for delivery at Tianjin — the lowest in 17 months. On Dalian Commodity Exchange, iron ore futures for delivery in January were quoted at 528 Chinese yuan ($82.59) a tonne on Wednesday against 561 yuan on November 5.

A major factor for the current decline in iron ore prices is data showing China’s iron ore imports in October dropping by over four per cent. This is the second consecutive month when imports dropped.

The drop in iron ore imports comes on the heels of steel production declining for three straight months till September. Steel output is feared to have dipped in October too with capacity utilization rates of steel mills across China plunging to near 60 per cent.

Weak demand to persist

Indian rating agency ICRA said Chinese steel-makers could brace for an extended period of weak domestic demand as the economy goes through the process of rebalancing of an overheated property market, which was a key growth engine driving the country’s steel demand for the last two decades.

Jayanta Roy, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA, said: “The Three Red Lines effectively put in place a check to reign in new housing supply in China. Directly and indirectly, real estate related activities reportedly contribute around 30 per cent to the Chinese domestic steel demand.”

With the Chinese property sector accounting for around 15 per cent of global steel demand, the ongoing readjustment away from a property driven model of growth in China is likely to have an adverse impact on the steel industry for an extended period, he said.

Long-term downtrend

In its note on plunging iron ore prices, FSCRIR said it was as per its expectations. Prices are expected to remain under pressure next year too. For the current year, Fitch Solutions has cut its price outlook to $155 a tonne (from $170) and to $110 for next year ($130).

“Demand strength from Chinese steel producers peaked in H121, and we expect demand to remain weak going forward with a concomitant improvement in global supply. Over the longer term, we expect iron ore prices to remain a multi-year downtrend...,” the rating agency, a unit of the Fitch group, said.

Iron ore prices had embarked on a long rally since the middle of last year besides surging in the first half of this year, but prices began to climb down from July.

Improving supply

“We expect prices to remain pressured into 2022 as supply improves and demand growth slows. That being said, we do expect that most of the downward movement is now behind us, and prices should not collapse in 2022 from current levels as they did in 2021,” Fitch Solutions said.

Chinese demand for iron ore stemming from the communist nation’s economic recovery and Beijing’s stimulus plan supporting the construction industry peaked in the first half.

China’s energy crunch resulted in declining steel production and consequently, the demand for iron ore starting in June till now, FSCRIR said, adding that while China’s energy crunch has begun to ease and production curbs on steel are being lifted gradually.

Tightening credit lines

However, it does not expect the demand impact seen during the early part of this year to return next year as construction projects have been completed and the pipeline had a lower number of new projects as China was focusing on tightening credit.

“Additionally, we see rising risks to the Chinese property market and thus iron ore demand from the construction sector, following Evergrande’s financial difficulties. In the event that Evergrande’s difficulties spark contagion for other Chinese property developers that may not be directly exposed, iron ore demand would be further hampered,” Fitch Solutions said.

Evergrande and the real estate sector’s difficulties could have a long-lasting negative impact on local government revenue in China as a large part of their revenue comes from land sales.

“As local government revenue is used to fund infrastructure projects that consume metals, a decrease in revenue could impact construction activity and metals demand in the coming years,” the agency said.

Decarbonising economy

In addition, China has been curbing steel production as an avenue to decarbonise the economy. A drop in steel production has impacted iron ore demand, it said.

ICRA said China had an unwavering resolve to achieve carbon-neutrality through sustained aggressive supply-side response. This could lead to stricter restrictions on production growth and fresh capacity addition so that the Chinese steel industry can be on track to meet its baseline emission reduction target.

Fitch Solutions said Brazil and Australia have begun to ramp up supplies, changing the low production scenario witnessed since 2018. In particular, Brazil’s Vale will be increasing production to 315-335 million tonnes (mt) and raising it further to 343 mt.

Australian producers were also maintaining their guidance on production, FSCRIR said, adding that iron prices will consistently trend downwards in the long term.