Iron ore prices have continued to head north since the beginning of this week, taking heart from China’s steel production hitting a record high, but analysts and experts wonder how long the ore’s bull run can last.

A few analysts see the run ending in the second half of this year or even go through a multi-year downtrend from next year.

Trading Economics Website said that iron ore with 62 per cent iron content increased to $214.99 a tonne cost and freight at the delivery port of Tianjin, China.

Prices for iron ore with 63.5 per cent iron content was quoted at $208.50 a tonne, cost and freight Tianjin. However, the prices are off the record highs witnessed last week.

Iron ore 63.5 per cent Fe has gained 31.55 per cent since the beginning of this year, while iron ore 62 per cent Fe has increased 38 per cent. The rates have been rising despite the Chinese government efforts to restrict production and curb pollution.

Chinese factor

China is the largest consumer of iron ore, importing nearly 70 per cent of the global shipments. Last year, it imported a record 1.17 billion tonnes.

According to the National Bureau of Statistics, China’s steel production last month was a record 97.85 million tonnes. Till April, China’s steel production was 375 million tonnes (mt), up 16 per cent compared with the year-ago period. The rise in steel production has resulted in demand for iron ore continuing and its stocks dropping at the Chinese ports.

Last month, the World Steel Organisation data showed that China produced 94 mt of steel in March, up 19.1 per cent year-on-year. On the other hand, India’s production was higher by nearly 24 per cent at 10 mt.

WSA outlook

The World Steel Association (WSA), in its short-range outlook for 2021 and 2022 last month, forecast steel demand to grow by 5.8 per cent this year to 1,874 mt after last year’s marginal decline. Next year, it sees steel demand growth to rise further by 2.7 per cent to 1,924.6 mt.

According to WSA, global construction is expected to reach the 2019 level again next year when the global automotive industry returns to the 2019 level.

The WSA, however, forecast steel demand for next year to below 2019 levels. This is where analysts and experts feel that sooner or later, iron ore prices could come under pressure.

Dynamics to take over

In its forecast for iron ore earlier this month, the macroeconomic and country risk research house Fitch Solutions said that despite prices rising to a record, there was still room for further upward movement. However, it said from the second half of this year the prices could stabilise.

London-based commodity markets analysts CRU said that it expected prices to decline as dynamics in the physical market could start taking over at some point. The timing and magnitude of the fall are challenging to predict, though.

Morgan Stanley, in its recent note, said the gains in iron ore would decline toward the end of the year after “overshooting levels that can be justified by the fundamentals.”

Dutch multinational banking group ING said that the surge in iron ore prices to record levels last month was speculative.

The group’s analysts said that optimism over central banks retaining supportive policies and steel production in China will remain robust (given the attractive margins on offer for mills) despite the ongoing production curbs and prove constructive for the iron ore market.

Supply risks

The suspension of economic dialogue between China and Australia had heightened the risks of supply and contributed to the recent surge in iron ore prices since China depends hugely on iron ore imports from Down Under, they said.

Australian ore exports make up 61 per cent of total Chinese iron ore purchases.

CRU principal analyst Erik Hedborg said that though “supply is constrained relative to strong demand, there is little to support prices at current levels for an extended period”.

Iron ore owes its current bull run to the 2019 dam accident in Brazil that cut leading producer Vale’s output to 300 mt then, and last year from 400 mt it had scheduled for these two years.

The London-based analyst firm said that Chinese demand for iron ore has been robust after the Covid-19 outbreak in early-2020.

“Steel production has been elevated due to sharply rising steel demand caused by stimulus measures boosting infrastructure investments and strong demand for steel-containing goods, both in China and on the export market,” Hedborg said.

Combination of factors

Fitch said strong demand from global steel and Chinese producers keeps prices elevated, while supply growth is lagging.

CRU’s Hedborg said the global market was tight as it was during the same time last year due to a combination of “improved inventory situation in China and higher demand in the rest of the world”.

The CRU analyst said that iron ore prices were higher than those of the highest-cost producer, and some low-cost producers were enjoying a margin as high as 90 per cent.

“We see little support for the iron ore price rising this high above the costs of the marginal producer in the market,” Hedborg added, pointing to an improvement in seaborne supply besides a seasonally stronger supply period.

Slow demand growth

This is because of the Australian cyclone season ending and the end of the rainy period in northern Brazil.

Fitch Solutions also said that prices would head lower in the second half of this year on improved supply and slower growth in demand.

The US credit rating agency, which raised its iron ore prices forecast for this year and next to $160 a tonne and $130 respectively, said the current levels are unsustainable in the long term for steel producers.

CRU’s Hedborg said that a fall in iron ore prices was subject to two factors in the market. One, if China continues to stimulate steel demand and its production stays higher, iron ore demand will remain at higher levels.

The other factor is supply risks, mainly from Brazil, since miners could face delays in getting licenses and seasonal ones such as shiploader availability.

But Fitch Solutions said that the demand in China from the stimulus could begin to wear off from the second half of this year as construction projects could be completed and the pressure on new projects in the pipeline could drop.

The forecasts have been supported by the interview Eduardo Bartolomeo, chief executive of Brazil’s Vale, gave to Financial Times, saying “iron ore is not in the cusp of a new supercycle”. He, however, sees the prices ruling at an elevated level till 2023.