Iron ore prices have rallied since early August — soaring almost 20% this month to six-month highs — supported by a pick up in buying from Chinese steel mills despite China’s flailing property sector and credit issues.
The rally coincides with increased buying from Chinese steel mills looking to replenish record-low inventories.
Going forward, the sustainability of iron ore prices depends on a rebound in steel prices, given that steel mills are currently operating at negative profit margins, according to a report by Bank of America (NYSE:BAC).
Bank of America wrote, “An improvement in margins is essential [to the outlook for iron ore], which first requires a rebound in steel prices.”
“Keeping in mind that steel mills have cut production of late, while steel inventories are relatively low, China’s steel market could rebound in the second half of 2023, and iron ore prices along with it.”
Currently, iron ore futures in Singapore are trading at approximately US$121.20 per tonne, up from nearly US$98.65 in mid-August.
Although prices have risen, not all experts share Bank of America's optimism. BMI, a unit of Fitch Solutions, expects a multi-year downward trend for iron ore, predicting prices to decline to US$50 per tonne by 2032.
Chinese policy decisions
The primary concern among analysts is whether China will adhere to its cap on steel production at just over 1 billion tonnes for this year. Should the cap remain, iron ore demand could see a decline. Yet, with government financial aid beginning to assist troubled property developers, short-term prices appear stable in the short term.
China's economic stance could also impact future iron ore demand. As China aims for a GDP growth rate of 5%, its lowest in years, local governments may neglect production cuts in favour of employment and growth, raising questions on the sustainability of current iron ore prices.
Bank of America cited the relaxation of home-purchasing restrictions in Chinese cities as a positive signal for iron ore demand, but remains "cautious" for 2024, expecting iron ore prices to trend downwards towards US$100 per tonne by the end of this year and then to US$90 in 2024.
Steel not just for property
However, steel demand comes not only from China’s property sector — growing amounts of steel required to manufacture electric vehicles, wind farms, ships, bridges and in other burgeoning sectors, that make up the shortfall from slumping residential construction.
"China is still the world manufacturing centre. All these [sectors] require steel," says Bin Jun Zhuang, Fortescue (ASX:FMG) Metals' former business development head in China.