MNI: Iron Ore Momentum To Stall Without Construction Rebound

Iron ore prices have likely peaked and will require a substantial rebound in steel demand – such as from a turnaround in the construction sector – to rise further, while more government intervention via “window guidance” could also weigh on the market, policy advisors and market analysts told MNI.

Iron ore climbed to an eight-month high in November, with the SGX Iron Ore Future Index rising 10.8% over the month, amid expectations of stronger Chinese demand following the State Council's October announcement of an additional CNY1 trillion in treasury bonds and speculation over housing market support.

“Prices are likely to fluctuate around the current level of USD130 per tonne in the near term, as the recent rapid rise has overdrawn the subsequent upward momentum,” said Wang Yongzhong, head of international commodity research at the Institute of World Economics and Politics, Chinese Academy of Social Sciences. Wang believes the housing sector may gradually stabilise in 2024, which will mildly lift iron ore demand. Traders have likely priced this in already, he added.

Tight output by major overseas miners and decreased domestic inventory boosted the iron ore price, alongside speculation of a fresh round of housing support that included a rumored "whitelist" of 50 developers eligible for funding, Wang said. (See: MNI: China Likely To Ease Developer Borrowing Restrictions)

Yan Yuejin, director at the E-house China Research and Development Institution, told MNI China’s “three major projects” – building affordable housing, renovating urban villages and constructing emergency public facilities – may marginally boost demand for iron ore, but the overall housing recovery will likely not filter down to developers via investment anytime soon due to their ongoing debt burdens. Investment will continue to suffer in 2024, he added, noting allocations to the sector fell 9.3% y/y in the first 10 months. (See: MNI: PBOC To Offer More Targeted Tools, Expand Balance Sheet)

LIMITED CORRECTION

January-dated iron ore futures, the most traded contract on the Dalian Commodity Exchange, rose about 60% to circa CNY1,000 a tonne in November from its May low point, as investors traded on positive sentiment, analysts from GF Futures told MNI. Further momentum will require steel demand to exceed expectations in the off-season, they said.

While authorities have warned against speculation and signalled greater government oversight, relatively low inventories will limit a significant price correction, the analysts added. Iron ore volume in 45 ports was at a multi-year low of 113 million tonnes at the end of November, while steel mills held steel inventory flat over the same period last year, the analysts explained.

Wang noted steelmakers have maintained low inventory due to weak domestic demand this year, though strong steel exports have tempered the impact. A Mysteel Research Institute report showed steel exports could reach as much as 90 million tonnes by year-end, close to 2014’s high of 93.78 million tonnes, while the trade will stay high in 2024 amid rebounding global demand.

GF Futures analysts added further production suspensions or restrictions were unlikely as local governments had already ordered steelmakers to keep crude steel output flat or lower than the previous year.

Regulators will likely continue with so-called “window guidance” via industry associations to smooth the pace of replenishment and crack down on hoarding, and speculation in the financial market, Wang noted. In the long run, China should diversify its iron ore sources to cut its reliance on imports by stabilising domestic output and recycling scrap, he added. The government should also encourage private companies to increase stakes in overseas mines and expand output, Wang argued.