Rebound in steel prices key to iron ore’s rally

The sharp rally in prices for the steelmaking ingredient this month has caught market pundits and investors off guard with hedge funds including Regal Funds’ Phil King and L1 Capital recently admitting that they were baffled by the moves higher given the weak Chinese economy.

L1 Capital’s Mark Landau told a conference in Sydney that the strength in iron ore was likely in anticipation of further stimulus in China – “we think some of the metals traders in that space tend to be very good at pre-empting government policy remarkably accurately”.

Glyn Lawcock, the head of resources research at Barrenjoey, has also said while physical prices for delivery were driven by robust steel consumption, speculators in futures contracts were betting that Beijing’s drip feed of stimulus measures would push prices higher next year.

Even so, prices are still forecast to fall back towards $US100 per tonne by the end of the year and then to $US90 in 2024. Iron ore giant BHP has also said that the price was unlikely to fall below $US80 for a sustained period in the immediate future.

Not ‘sustainable’

“We don’t think the iron ore price rally can be sustained for much longer,” analysts at Capital Economics wrote in a report. They added that the uptick in steel demand was “likely to prove temporary”.

Rio Tinto chief executive Jakob Stausholm also told Bloomberg this week that Chinese consumption of steel was close to topping out, with demand next year likely to be similar to 2023.

“We are foreseeing that the peak steel demand in China is about to be reached,” he said. “Not because the Chinese economy is not growing, but just because of the maturity it has reached.”

Bank of America is more hopeful in the short term and pointed to a flurry of recent policy moves in China that had brightened the outlook for steel and therefore iron ore.

In particular, the bank cited the decision by Chinese officials to allow major cities to relax home purchasing restrictions in non-core areas and to allow secondary cities to do the same in all areas. The property sector accounts for about 40 per cent of China’s iron ore demand.

Bank of America also said that some Chinese cities could ease payment ratios to further unleash housing demand while others could also offer subsidies to cover part of deed taxes or parking spaces, as the Chinese city of Nanning recently announced.

It also said that housing demand and property investment could renew urban villages in larger Chinese cities. It noted that policymakers had reportedly decided to issue special-purpose bonds to finance such programs next year like in Guangzhou which plans to roll out a guideline by the end of 2023.

Despite this, Bank of America is also “cautious” on iron ore for 2024 and like Capital Economics expects iron ore to fall back towards $US100 in the final months of this year.

It then expects prices to rebound to $US110 a tonne in the first quarter, ease back to $US100 in the June quarter and fall to $US90 in the third quarter.

With reporting by Peter Ker