Renewed Chinese demand likely to buoy iron ore prices

Iron ore prices are likely to gain this year on renewed Chinese demand, which is expected to stay strong until next year, and lack of any significant rise in supply growth.

US-based Fitch Solutions Country Risk and Industry Research (FSCRIR) said iron ore prices, which had been on a southward-bound journey since July 10 after touching $220.1 a tonne, reversed course in December to embark on an uptrend. 

Chinese demand is expected to remain strong until next year as Beijing has renewed its stimulus package for the infrastructure sector in the face of slowing economic growth. 

Contrasting view 

“On the supply side, we do not expect any significant increase in iron ore supply from major producers who will place an emphasis on value over volume in 2022, and this is added to high supply risks over weather issues and continued Covid-19 operational disruptions,” the research agency said.

Last week, Huw McKay, Vice-President, Market Analysis and Economics of Australian mining firm BHP, had a contrasting view that there was surplus iron ore in the second half of 2021, and, on balance, it is likely to remain in that state this year too.

But Fitch Solutions is a tad bullish on its views, raising its iron ore price forecast for 2022 and 2023 to $120 a tonne and $110 from its earlier projections of $90 and $75, respectively. 

On Tuesday, the most traded May futures on the Dalian Commodity Exchange was quoted a tad lower at 684.5 Chinese yuan a tonne ($107.93). Currently, iron ore delivered at Tianjin port is quoted at $141.11 a tonne cost and freight.

Chinese crackdown

Iron ore prices have gained over 25 per cent or nearly 28 per cent since the beginning of this year. 

Fitch Solutions cited continued supply constraints from mining firms, especially Vale and Rio Tinto, whose production fell short of guidance as a reason for the rise in prices, which were further boosted by the Chinese demand.

Earlier this month, as prices rose to near $150, the Chinese government cracked down on speculative trade, leading to a fall in the prices. China’s National Development and Reform Commission (NDRC) said it would send investigation teams to the commodity exchange and key port to look into iron ore inventories and trading in the spot and futures markets. 

This was followed by the Dalian exchange doubling transaction fees for some iron ore futures contracts from February 16.

McKay also concurred with the view that NDRC “rhetoric” has led to prices easing currently. But Fitch Solutions said the fall in prices witnessed currently is temporary. 

Jan 25 announcement

“In fact, we believe that prices will receive support from supply constraints and renewed Chinese demand strength in 2022, such that the annual average iron ore price for 2022 and 2023 will remain above pre-Covid-19 levels,” the research agency said.

On Chinese demand, it said it was more positive on China following a number of developments. “First, and most importantly, China seems to be looking at increasing its financial support to the economy in 2022, amidst weakening economic growth prospects driven by real estate sector weakness and strict Covid-19-related lockdowns,” it said. 

Fitch Solutions pointed to the Chinese government announcement on January 25 that Beijing will set a reasonable annual quota for local government bonds to boost infrastructure investment in 2022, which will support iron ore demand and prices. 

Steel sector picks up

McKay said potential policy initiatives that seek to increase China’s self-sufficiency in ferrous units besides other factors will have an impact on the market. 

FSCRIR said it expects iron ore consumption from the steel sector to pick up strongly this year after power shortages in the second half of 2021 limited steel manufacturing activity.

McKay said in the long run, the price will likely be set by a higher cost, lower value–in–use asset in either Australia or Brazil.

Fitch said while production growth from Brazil and Australia has started to improve, loosening tight supplies on the seaborne market, miner Vale will take time to return to levels before its operations were affected by the collapse of the Brumadinho dam.

McKay said there were chances of a prospective entry of new supply from West Africa with its likelihood increasing.

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