Iron ore price falls, but is it a pause before further rises or the top?

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An article in the Australian Financial Review (AFR) underlines the bullish narrative accompanying the iron ore price’s performance this year.

“Chinese steel consumption has just blown consensus out of the water this year,” the report notes, citing analyst comments, adding, “The macro backdrop, in terms of China, is very strong for all commodity consumption, and steel and iron ore is doing particularly well.”

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Rising money supply

The post points to rising money supply, which moved up 10.4% year over year in August, as a market-leading indicator of further strength in demand this year and iron ore producers’ relative underperformance relative to projections.

That is particularly true for Vale, which would need to achieve a run rate of close to 400 million tons per annum for the second half of the year to achieve its earlier production guidance of between 310 million and 330 million tons as a whole after a poor, COVID-impacted first half.

Source: Australian Financial Review

Iron ore price recovery

The recovery in iron ore prices has been impressive.

Dalian iron ore has risen more than 60% this year. The Singapore SGX benchmark has gained about 50%, underpinned by China’s strong demand, Reuters reported. China continues to ramp up steel output after rolling out infrastructure-led economic stimulus measures.

Source: Australian Financial Review

Relatively robust steel prices and a lack of significant inventory build despite record-high run rates supports a story of strong demand recovery. Meanwhile, the rising iron ore price provides support for steel prices. Margins remain constrained, meaning mills have little scope of overproduction if prices were to slide in an oversupplied market.

Source: Australian Financial Review

Iron ore takes a step back

Yet, prices have eased in recent days.

After such a strong recovery, how much further do prices have to go? Are we seeing the top or just a temporary breather before the price moves yet higher?

Industrial production in China accelerated in August. With the Chinese national holidays coming in early October, continued restocking is likely to support prices over the next 2-3 weeks.

However, as winter approaches, construction is unlikely to continue at the heady pace of this summer.

China’s stimulus measures have been a major driver of both sentiment and actual demand. However, the measures are not as construction-heavy as they were after the financial crisis.

Current policy measures being talked about – often new policy is discussed sometime before implementation – are geared more toward steering the economy further toward the long-term goal of being consumption-reliant rather than export-dependent industrial demand.

Beijing’s aim is the property market should be about having a place to live, not a speculative investment opportunity. So, new policies are likely to depress speculative real estate construction. Ongoing state stimulus is also said to be more focused on investments in the tech sector and R&D, as opposed to building highways and railway lines.

A policy topic being hotly debated is the opening up of China to steel scrap imports in early 2021. That is a move that could see an increased switch for more environmentally friendly electric arc furnace steel production, thus undermining increasing iron ore demand.

Iron ore prices in 2021

After such a strong price recovery in 2020, a fall back in 2021 would not be unexpected.

Leading commentators have revised up their medium-term price predictions. Still, they are suggesting average prices for 2021 will be below current levels.

According to the Australian Financial Review, JPMorgan forecasts iron ore prices will trade at U.S. $105 per metric ton 2021. Goldman Sachs is forecasting a price of U.S. $90 per ton for 2021. Meanwhile, China’s MySteel is forecasting prices to average U.S. $95 per ton through 2021.

The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021 — including expected average prices, support and resistance levels.

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