Iron ore’s incredible rebound could be short-lived

A rebound in the price of iron ore has failed to ignite hopes of a return to the dominance of the steel-making commodity over 2020-21, with the themes that drove its collapse last month still forces to be reckoned with.

While the energy crisis has gripped headlines, iron ore has enjoyed a quiet renaissance, recovering from a 14-month low. On Monday, the spot price of iron ore soared 9.4 per cent to $US135.03 a tonne, a 45 per cent climb in three weeks, Fastmarkets MB says.

But commodity strategists warn the rally is driven by restocking demand and that market fundamentals suggest the price will weaken through the end of the year.

“It’s being driven partly by restocking from the National Day holidays and so the question mark is how long that continues for,” said Lachlan Shaw, co-head of mining research at UBS. “Underlying demand is still not that strong, and we don’t have conviction yet as to how long the current rally can endure.”

At the start of the month, China celebrated its week-long National Day Holiday. Traders returned to their desks on Friday, pushing the price higher, amid reports steel mills in Tangshan, Jiangsu, Zhejiang, and Anhui were increasing output in October as steel production cuts made in September exceeded targets.

Macquarie says no further sequential cuts in production are required from September’s levels for the industry to meet its zero-growth target in 2021.

But beyond the short-term bounce, the fundamental drivers of longer-term demand appear to be weak still.

“Demand is being impacted by power cuts in manufacturing and the property slowdown, so we’d still not have much conviction there,” said Mr Shaw.

“Property activity has slowed and it’s been slowing all year, so there’s been no significant sign of easing. And with infrastructure, there’s no sign of significant increase either so it’s hard to form a view that demand is structurally strengthening.”

Morgan Stanley said while steel margins were keeping the price elevated, the level of supply set to hit the market would likely push prices lower.

“It looks like that China’s strong steel mill margins are holding the price up for now,” said Morgan Stanley commodity strategist Marius van Straaten.

“That said, we believe that the iron ore price should be set by it own supply-demand fundamentals eventually, especially given the overhang of China’s rising iron ore port stocks and more than 200 vessels queuing to discharge an estimated 25 million tonnes of ore. Therefore, we are still iron ore bears, and it remains our least preferred commodity on a six-month horizon.”

Morgan Stanley is forecasting the price of iron ore will average $US85 a tonne during the final quarter of 2021.

“We believe iron ore can dip further into the fourth quarter of 2021 and first quarter of 2022, but expect a bounce by the second quarter, as China’s steel production curbs are lifted and infrastructure stimulus filters through,” said Mr van Straaten.

Authorities in China are still keen to keep output limited this year, particularly with the scheduled February 2022 Winter Olympics in Beijing.

“We think winter production cuts for 2021 coupled with production cuts to keep the sky clear and snow clear in February remain a headwind,” agreed Mr Shaw.

While the second quarter of the calendar year is normally a strong period for steel growth, UBS is still expecting the price in 2022 to be weaker. “The target for steel production for next year is to be flat on 2021 so there’s no structural lift in demand ahead,” said Mr Shaw.

“The big producers are also all looking to lift shipments, so it will come down to whether they can do this.”

UBS is forecasting the price of iron ore will average $US85 a tonne through 2022 and then $US80 a tonne through 2023.

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