CBA warns of $US80 iron ore price as China’s steel crisis deepens Alex GluyasMarkets reporter
Sep 17, 2024 – 10.12am
Iron ore prices need to keep falling well below $US90 a tonne to force more producers in India to cut output and resolve the enormous piles of the steel-making raw material languishing at Chinese ports.
Commonwealth Bank warned on Tuesday that the risk that the iron ore price falls to $US80 a tonne was “not too far from current reality”, while Goldman Sachs said it believed iron ore would hit $US85 a tonne in the fourth quarter of this year. That’s 15 per cent below its prior forecast of $US100 a tonne and compares to the $US90.95 a tonne spot price.
The price of Australia’s key export has already collapsed 20 per cent since July as China’s deteriorating property sector weighed on steel consumption, and strong supply pushed the physical market further into surplus.
While China’s iron ore demand is showing signs of stabilising, Goldman said that global supply remained robust, with total daily iron ore shipments running 2 per cent higher than this time last year.
The broker specified that lower-cost producers in India needed to curtail production to re-balance the physical market. That is despite India already reducing its iron ore exports.
“We believe that another leg lower in prices … would be needed to completely remove new Indian tonnes from the seaborne market and pressure supply further down the cost curve to rebalance fundamentals,” said Goldman analyst Aurelia Waltham.
Analysts are sceptical of China’s ability to achieve its full-year growth target of 5 per cent. Goldman and Citi cut their projections to 4.7 per cent over the weekend, while Morgan Stanley trimmed its forecast to 4.6 per cent.
That was in response to Chinese data that showed industrial output in the world’s second-largest economy slowed to a five-month low in August. Consumption and investment also slowed more than forecast, while home prices declined from the prior month.
Demand pressure caused China’s steel production to contract 10.4 per cent in August from last year, and follows a 9 per cent decline in July.
A sustained 8 per cent fall in China’s steel output would justify iron ore prices of $US90 a tonne, while a sustained 10 per cent decline would justify prices at $US80 a tonne, according to CBA, which cited BHP’s latest outlook.
“The risk that iron ore prices fall to $US80 a tonne is not too far from current reality, and a level reached as recently as the fourth quarter of 2022,” said Commonwealth Bank resources analyst Vivek Dhar.
Australia’s largest bank expects Beijing to defend its growth target next quarter through some form of central government infrastructure spending, which it said would keep iron ore between $US100 and $US110 a tonne in the fourth quarter.
In a separate note, the bank’s FX team forecast the People’s Bank of China to cut interest rates by 10 basis points and the required reserves ratio by 25 basis points by the end of this month. Signs of improving demand
That could stabilise iron ore markets in the two weeks leading into the holiday as steel mills re-stock raw materials from the stockpiles sitting at Chinese docks. Iron ore futures edged 0.9 per cent higher to $US92.05 by midday on Tuesday.
Indeed, in-plant stocks at Chinese mills rose 2.6 per cent last week compared to the week before, marking the largest jump since the major re-stocking that took place in the lead-up to the Lunar New Year.
Iron ore prices in the near term could also be supported by a short squeeze given the “substantial” short positioning in both iron ore and China’s steel markets, Goldman said.
But while the build-up in port stocks came to a halt last week, they remain 30 million tonnes above the September average between 2016 and 2023.
Meanwhile, total Chinese iron ore stockpiles, which includes tonnes held at mills, continue to rise counter-seasonally. That is despite Indian iron ore shipments declining in response to lower prices.
