Iron ore to plunge below $US100 into a bear market: Citi

Alex GluyasMarkets reporter

Jun 6, 2024 – 2.37pm

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Citi is tipping iron ore prices to plunge into a bear market in the coming months amid ongoing concerns about Chinese steel demand and an increase in supply of Australia’s key export.

Iron ore traded in the spot market has plummeted 13 per cent to $US107 a tonne in the past fortnight, and Citi is now expecting prices to sink a further 12 per cent from current levels to $US95 a tonne.

That implies a 20 per cent decline from its cyclical peak above $US120 a tonne, meeting the technical definition of a bear market.

Sentiment among Chinese steel mills is turning increasingly negative. Bloomberg

Iron ore prices had remained elevated thanks to a raft of property measures announced by Beijing over the past month, and expectations of further policy support ahead of a meeting of the Chinese Communist Party’s central committee, known as a “plenum”, in July.

But commodity strategists have argued that while the measures should support a rebound in construction activity from current lows, it will do little to stimulate new projects, which are the real drivers of steel and iron ore demand.

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“These measures in our view are unlikely to boost incremental steel demand as property starts are likely to be negative this year,” said Citi strategist Shreyas Madabushi.

Citi, which already downgraded its near-term iron ore forecasts last month due to weak April credit data in China, cut its projection by a further 10 per cent on Thursday to $US95 a tonne from $US105 a tonne.

The broker highlighted that port inventories in China remain elevated despite the usual seasonal drawdowns, while steel inventories were reducing slower than average.

Additionally, both hot metal and crude steel production is likely to be capped amid the seasonal slowdown in construction activity, which is taking place at the same time as supply from the major mining companies is improving.

Indeed, the combined shipments for Rio Tinto, BHP and Fortescue rebounded strongly in the June quarter following a slow start to the year, according to Macquarie.

While the broker attributed the soft performance in the first quarter to ex-tropical cyclone Lincoln, analysts noted that the second quarter was a seasonally stronger period, with better weather and miners pushing to meet June year-end production guidance.

Inventories stacking up

Macquarie agreed sentiment around the steel market remained weak against the backdrop of softening hot metal production and iron ore demand.

“With port stocks approaching historically high levels and steel margins negative, steel mills’ sentiment appears increasingly negative with plans to destock,” Macquarie analysts wrote in a note to clients.

Westpac also agreed that the 13 per cent correction in iron ore prices was needed, but noted that it was starting to see signs of increased activity in China’s residential property market.

This “is not surprising given the shotgun approach to policy over the last few months,” said Westpac’s head of commodity and carbon strategy, Robert Rennie.

Mr Rennie said he would therefore be surprised if iron ore fell much below the $US100 a tonne level.

“A period of consolidative trade above $US100 looks to be on the cards, before we head lower again later in the year,” he said.

That scenario would still see iron ore trade far above budget estimates, with Treasury forecasting prices to be about $US60 to $US70 a tonne by March next year.