KEY POINTSCiti analysts upgrade short-term iron ore price...

KEY POINTS

• Citi analysts upgrade short-term iron ore price forecast to US$140/tonne, citing China's expected fiscal stimulus
• Anticipating a fiscal push, Citi predicts China's focus on urban redevelopment and affordable housing, potentially boosting property starts by 8% in 2024
• Despite overbought conditions, Citi suggests buying iron ore during any dip until Chinese New Year

Citi says the iron ore price rally has more legs to run on expectations of a larger and sooner-than-expected stimulus push from China.

The analysts upgraded their 3-month price forecast for the steel-making commodity to US$140 a tonne from US$120 a tonne.

This week, iron ore prices have rallied to levels not seen since June 2022 as Chinese inventories fall to near 7-year lows and as speculators hope that China will unleash fresh fiscal stimulus to shore up its economic recovery.

Singapore iron ore futures inched higher on Wednesday, up 0.3% to US$134 a tonne on the November contract. Prices have managed to trade higher in 18 of the last 23 sessions.

Singapore iron ore futures (Source: TradingView)

A Bullish Base Case

“We now expect in our base cases that China will likely increasingly push towards fiscal expansion to engineer investment-led growth, and this time with a focus on urban village redevelopment/affordable housing to support overall property market related activity in 2024,” Citi analysts including Wenyu Yao and Maximilian Layton said in a note on Tuesday.

“China’s property new starts growth could potentially flip into positive territory from here if Beijing were to follow through.”

A ballpark 1 billion square metres in floor space is expected to be developed through an urban village redevelopment program over the next five years, according to Citi. The surge in construction activity signals a potential 8% year-on-year increase in new property starts in 2024 (compared to an 11% decline in previous forecasts).

Infrastructure could also remain the focus on fiscal policies, which opens the door to potential upside metals demand from “China's old cyclical sectors.”

Buy the Dip

“Any dip in iron ore from here through to at least Chinese New Year could represent a buying opportunity,” the analysts said. This recommendation bodes well with the seasonal patterns for iron ore prices.

Iron ore prices typically experience a bullish trend from November to February due to factors such as stockpiling, supply disruptions, and the Chinese New Year.

The historic data tells us that the average gain from November through to next February:

• Last five years +21.1%

• Last ten years +14.4%

• Last fifteen years +18.3%

Source: Market Index

Overbought Conditions

Iron ore prices have run pretty hard and well into overbought territory.

• Past week +1.9%

• Past month +17.5%

• Past three months +24.2%

• Past six moths +27.0%

Using a basic technical indicator such as the RSI (relative strength index) – which measures the speed and magnitude of price movements where readings above 70 indicate overbought conditions and readings below 30 indicate oversold conditions – iron ore has not been this overbought since:

• March 2023: Prices topped at US$130 and sold off back to US$100 by early May

• May 2021: Prices topped around US$200

• January 2021: Prices traded sideways around US$165 for two months and rallied to US$200 a tonne by May

Singapore iron ore futures with RSI (Source: TradingView)

Fortescue (ASX: FMG) shares – which is arguably the best ASX-listed proxy for iron ore prices – are trading within an arms reach of all-time highs.

The $25 level is on par with peaks from January and July 2021, when iron ore prices were trading at US$165 and US$200 a tonne.

Fortescue weekly chart (Source: TradingView)