Iron ore’s tumble faster, sooner than Liberum expectedApr 27, 2023 – 4.39am
Liberum Capital, already long-term bearish on iron ore, says the commodity’s drop over the past six weeks has taken it by “surprise”, and there’s potentially more weakness ahead.
The iron ore spot price briefly traded below $US100 a tonne in China this week, after a meeting during which officials at the China Iron and Steel Association reportedly told Chinese mills to cut output.
Liberum said in a note that there had not been this level of trade and price weakness throughout China’s ore-to-steel supply chain, this early in the season, since 2012.
“Back then, the trade was being rattled by an incoming President Xi [Jinping], who was busily rolling out a surprise national ‘political reform’ program,” the London-based firm said.
“This year, bearish drivers are more fundamental than political; turns out, there was no post-lockdown bounce like 2020; it was just a good old-fashioned seasonal uptick. And compared to those of the last decade, it was actually pretty weak.”
Liberum cited five key reasons why prices are poised to remain weak: weak industry demand; 2023 inventory restocking has ended; China steel production is capped; Chinese authorities are continuing their effort to check any price speculation; and there’s been a recovery in supply from miners.
“Among [iron] ore’s first-use players, reports are emerging of steel mills cutting product prices ... and paring output rates, on subdued demand: rare behaviour, this early in the year,” Liberum said, adding that these developments were more typical in the December quarter.
Liberum said one key difference in trying to assess China’s steel sector was the government’s intervention, dating to 2021.
“A widely known ‘rule-of-thumb’ for China’s steel industry is that annualising year-to-date total crude production for January-May data provides an accurate estimate of the total for that year,” Liberum said.
“Basically, it exploits the seasonally symmetrical rise/fall of China’s steel output rate. That rule doesn’t work anymore.”
The government’s intervention had changed the mills’ behaviour, Liberum said. “Members of this highly competitive industry are now front-loading production, to get ahead of the cap’s enforcement” and that had “probably pulled China’s peak steel production rate forward by about a month”, to late April from June.
According to Liberum’s price view, the spot price for benchmark iron ore has dropped 23 per cent from its mid-March peak of $US133 a tonne. The commodity is already trading at Liberum’s previous $US101 a tonne forecast 2023 average.
Liberum sees the average price for the benchmark drifting to $US89 a tonne in 2024, $US85 in 2025 and $US71 in 2026. It did not update its forecasts in its latest note.
Iron ore was 2.4 per cent higher to $US104.85 a tonne on the Singapore Exchange on Wednesday.
In a note dated Monday, Citi Research cut its three-month iron ore price forecast to $US100 a tonne from $US120 a tonne, “with the possibility of further downside risk towards $US90 a tonne, where we see meaningful cost support”.
Citi said steel demand in China had failed to improve amid an uneven economic recovery.
“Without meaningful stimulus, any major turnaround in steel demand from major end-use sectors would likely be delayed.”
Chinese steel prices are expected to stay range-bound in the near term, according to the latest monthly report released by the China Iron & Steel Association, according to a report by Mysteel.
Chinese steel producers should take measures to maintain the balance between supply and demand, as domestic steel production had increased rapidly while the growth in demand had been limited due to the depression in the real estate sector, CISA warned, according to Mysteel.
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