Iron ore prices are forecast to continue their upward trend in early 2024 as China's vigorous efforts to revive its property sector defy global economic headwinds.
This development poses significant challenges for iron ore bears, who have historically bet against the commodity's pricing strength.
Many Australian fund managers and resource specialists are focusing on the pricing pressures facing the commodity — the prevailing logic suggests that global economic slowdown, particularly in China, should lead to a decrease in demand while supply remains stable.
Typically, this scenario would result in a price drop, considering the major iron ore miners' production costs are well below the current spot price of about US$145 per tonne.
However, China — the world's largest buyer of iron ore, purchasing more than 1 billion tonnes annually primarily from Australia — is countering this trend.
Despite its slower economic growth and struggling housing market, China aims to maintain its annual GDP growth target of around 5%. With that goal in mind, various measures have been put in place by the Chinese government, which have historically thwarted the expectations of iron ore bears.
Starting off the new year, spot prices are hovering around US$140 per tonne but major broking houses have predicted a fall in iron ore prices. Citi forecasted prices at US$120 per tonne in 2024 and US$100 per tonne in 2025, with a further drop to US$85 per tonne thereafter.
Contrary to these predictions — and bullish for iron ore — the People's Bank of China has implemented measures to stimulate the housing market. This includes restarting the pledged supplemental lending program and extending a further ¥350 billion (US$72 billion) to major banks last month.
This was the first extension of the 3-5 year funding program since November 2022 and represents the second-highest amount disbursed in a single month since the program began a decade ago. The funds are anticipated to support housing starts and infrastructure investment.
The pledged lending program is anticipated to continue throughout the year, while China reducing its key policy rate, expected as early as this month, would likely further fuel the iron ore market.
Iron ore prices reached US$145 per tonne in late Wednesday trade. Despite arguments that this stimulus is a response to a softening economy, it implies that bears betting against iron ore prices might face challenges and require patience to realize gains.
In Australia, major iron ore miners like BHP (ASX:BHP), Rio Tinto (ASX:RIO), and Fortescue (ASX:FMG) have recorded record highs in the past week.
Ongoing high prices should also benefit smaller players in the iron ore sector, such as CuFe Ltd (ASX:CUF) with its Australian operations and Cyclone Metals Ltd (ASX:CLE) with its Canadian projects.
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Another is Akora Resources Ltd (ASX:AKO), which has made significant strides in developing its Direct Shipping Ore (DSO) operation at the Bekisopa Iron Ore Project in Madagascar.
Following a promising scoping study in November, the company has embarked on a pre-feasibility study (PFS) for the project, expecting substantial revenue and operational margins.
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