Iron ore prices likely to be capped by Chinese property sector weakness

Iron ore prices will likely be capped by the weakness in the Chinese property sector, though Beijing’s blast furnace steel production and ore demand remain stable. Analysts’ view is prices will moderate, though some feel they could be volatile this year. Since the start of 2024, spot prices of iron ore 62 per cent grade have dropped by 5 per cent to $129.29 a tonne cost and freight for delivery at Tianjin, China. 

The Australian Office of the Chief Economist said prices are likely to moderate over the outlook period to 2025 as supply rises and demand eases.

• Also read: Over 90 per cent of Indian iron ore exports made to China

Price forecast

Research agency BMI, a unit of Fitch Solutions, said it maintains its 2024 iron ore price forecast at an annual average of $120 tonne. 

This is “in light of continued resilience in prices over the positive sentiment stemming from hopes of a turnaround, with some form of stimulus from the Chinese government,” it said. The year-to-date average in 2024 thus far is $129/tonne.

ING Think, the economic and financial analysis wing of Dutch multinational financial services firm, said iron ore prices are set to remain volatile this year as the market continues to respond to any policy change from Beijing. 

“We expect them to average $120/tonne in 2024, assuming the government will introduce additional measures to support the economy, with iron ore remaining dependent on economic stimulus from China,” said Ewa Manthey, ING Think commodity strategist.

• Also read: Iron ore exports, coking coal imports lead to a 5% increase in traffic across India’s ports in April – Dec

Strong imports

BMI said prices have retained their resilience since the beginning of 2024 on the back of improved market sentiment following the People’s Bank of China’s announcement of a 50 basis point cut to the reserve requirement ratio. On Tuesday, the Bank cut the five-year loan prime rate by 25 basis points to 3.95 per cent, higher than market expectations. 

The research agency said prices have also been supported by strong Chinese imports in 2023 and expectations that this trend will continue throughout the first few months of 2024. 

“In 2023, Chinese imports rose by 6.6 per cent y-o-y to a record high of 1.18 billion tonnes amid the absence of official government caps on steel output. We further note an increase of iron ore inventories at Mainland Chinese ports, rising to 124.6 million tonnes as of February 2, 2024,” it said.

Manthey said with the recovery path for China still bumpy, iron ore will remain sensitive to Chinese policies. “Prices are, therefore, likely to remain volatile, at least in the short term,” she said.

Concerns over realty sector

However, over the last couple of months, the Chinese government has moved forward with a series of stimulus measures to turn around its ailing economy, which have supported iron ore prices, the ING Think commodity strategist said.

BMI said continued weakness in the Chinese property sector, which has been weighing on overall economic growth, is likely to cap iron ore price growth over the coming months. Prices remain sensitive to stimulus announcements, it said.

Manthey concurred, “... there are still concerns when it comes to China’s economy, particularly surrounding anything related to the property sector, which accounts for about 40 per cent of demand for iron ore.” 

New home starts – the biggest steel demand driver – fell sharply in 2023 by more than 23 per cent. “This should continue to suppress steel demand in 2024,” she said.

BMI said on the supply side, major iron ore miners announced relatively stable production guidelines for 2024, which will work to limit the upside for iron ore prices along with China’s regulation of futures markets.

The ING Think commodity strategist said with the supply side largely stable, demand in China will continue to drive iron ore prices going forward.

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