Blog

Jul 21, 2023

Analysts tip iron ore price to fall by year

A two-week rally in the price of iron ore may prove shortlived, with some analysts predicting the Australia’s key export commodity will fall back to $US100 a tonne before the end of the year. After

A two-week rally in the price of iron ore may prove shortlived, with some analysts predicting the Australia’s key export commodity will fall back to $US100 a tonne before the end of the year.

After touching close to the $US100 price point just weeks ago, iron ore futures in Singapore now trade around $US113 a tonne for September contracts.

Iron ore shipments at the docks in Putian, in China’s Fujian province. Getty

The gains were further spurred on Friday, when China’s policymakers announced a suite of measures to ease mortgage rules and lift the nation’s struggling property sector. The industry accounts for about 40 per cent of China’s steel demand.

Data from the World Steel Association last week, which showed an 11.5 per cent lift in China’s crude steel production in July, year-on-year, also buoyed sentiment.

However, Commonwealth Bank analyst Vivek Dhar noted the production jump was more reflective of the declines seen a year earlier, than a meaningful lift in production.

“We still think China’s steel demand will remain weak, driving lower steel output,” he said in a market note on Monday.

ANZ senior commodity analyst Daniel Hynes said he was a little surprised by the two-week rally given the market fundamentals at play.

“We saw a broader rally across industrial metals off the back of hopes of further stimulus measures. So, it doesn’t come as a complete surprise, but the backdrop is still fundamentally weak,” Mr Hynes told The Australian Financial Review.

“We never expected any sort of short-term rally to last too long, as it’s going against the evidence that we’re seeing.”

Mr Hynes pointed to declining new construction starts in China as a key indicator of the weakness of steel demand, a predominant driver for iron ore prices. Year-on-year, China’s new construction starts fell another 25 per cent in the first seven months of 2023, according to the latest government data, adding to an almost 40 per cent decline in 2022.

“The steel demand that we calculate from the housing market remains particularly weak,” the analyst said. “The new start and construction activity in the sector is at levels we haven’t seen for several years and is not looking like it will improve anytime soon.”

Mr Hynes also said he was watching China’s struggling property developers for any sign of recovery.

“They’ve been reluctant to start new projects because of their financial position. Until that rectifies they’re going to look to support balance sheets with the sale of a lot of the unsold inventory they have on the books,” he said. “We’re going to be following that pretty closely over the next 12 months.”

While the rally has prompted ANZ analysts to adjust their short-term price expectations for iron ore, Mr Hynes held firm on the “real possibility” of prices breaking below $US100 per tonne by the end of the year.

Likewise, Mr Dhar said falling steel demand may drive iron ore prices to $US100 per tonne by 2023’s final quarter.

“We continue to believe that policy will struggle to reverse the fortunes of new construction starts given low homebuyer confidence,” Mr Dhar said. “Given just how low homebuyer confidence remains in China, we think any stabilisation in China’s property sector will likely take place next year.”

The bleaker outlook for the commodity arrives as beleaguered Chinese property developer Evergrande plunged almost 90 per cent on Monday, when it resumed trading in Hong Kong after a 17-month trading halt. Concerns continue to circle around Evergrande, after it reported a 33 billion yuan loss ($7.03 billion) in the first half of 2023.

The impact of lower pricing in the first half of the year was also being felt closer to home, with miner Fortescue Metals joining iron-ore peers BHP and Rio Tinto in posting lower profits amid China’s economic downturn.

Follow the topics, people and companies that matter to you.

Fetching latest articles