Bank of America’s outlook for iron ore is bleak, reflecting in part China’s “heavy hand” in reorganising commodity-intensive parts of its economy, with the slowdown and lack of stimulus in the property sector an immediate concern.
In a note titled “All the king’s horses and all the king’s men unlikely to put iron ore together again”, the bank said iron ore could fall to as low as $US70 a tonne.
On Wednesday, the spot price rebounded 17 per cent to $US108.70 a tonne as Chinese buyers returned after an extended weekend break. The price reprieve is likely to prove temporary.
“China‘s steel production has fallen by 12.6 per cent in August as authorities have required steel mills to reduce output over emissions.
“With the Olympics just around the corner and several steel production hubs in close vicinity to Beijing, it is highly likely that the current curbs will prevail into 2022,” the bank said.
“Against the bearish backdrop, what could keep the iron ore market in balance? In our view, mine supply is critical, but we are concerned that miners may not prioritise value over volume.”
The bank said while China’s iron ore imports are elevated, they have remained below last year’s highs over summer. At the same time, exports from Brazil have already pushed above seasonal records a few times this year and Vale is set to ship even more tonnages.
Incidentally, the mismatch between iron ore demand and supply is also mirrored, which suggests that the gap between global steel production and iron ore exports has been closing gradually, BofA also said. “Usually, this is an indicator for lower prices.”
In its overall assessment of the commodity market, the bank said “as the global economy emerged from the first COVID wave, raw material demand rebounded swiftly. This, along supply dislocations, triggered a sustained bull market. That said, the macro economic backdrop has become patchier of late.”
The bank said its forward looking commodity business cycle analysis is slowly moving towards the “downturn” phase and central banks are starting to gradually remove stimulus.