Benchmark iron ore prices based on cargoes with a 63.5% iron ore content for delivery into Tianjin popped to $134.5 per tonne, the highest in nine months. The move has taken back losses from a volatile 2022 with macroeconomic headwinds and low demand for steel-making ingredients. Since the reversal of zero COVID policy we have seen short covering and outright buying of iron ore futures on hopes of stronger demand from China amid its economic reopening.
During its National People’s Congress session, the Chinese government announced a 5% growth target for this year, dashing hopes of a more ambitious plan but confirming the ample stimulus to the infrastructure and construction.
China’s steel production seasonally improves by March/April, and there are some signs of seasonal supply disruptions. The rainy season has hurt Brazil’s iron ore shipments, which were down 20% year on year in the first two weeks of 2023.
The risk is the Chinese property sector’s liquidity crisis will continue to hamper demand for iron as metallurgists turned down steel output to match lower demand from constructors, underscored by a decline in new home purchases. Commercial banks have agreed to extend $162 billion in new credit lines for private developers and authorities lifted a ban on equity refinancing for firms in the sector, while the PBoC continuously injected liquidity into the economy.
Morgan Stanley’s in January issued a note on iron ore about China Minerals Resources Group (CMRG), the Chinese government’s new central buying function for iron ore. They still expect a tighter iron ore market in the months ahead, which should push the current rally into 2Q23. MS compares iron ore’s past bull market from peak to trough, since the inception of spot pricing.
MS outlines that the current iron ore rally can only be maintained beyond the Lunar New Year break if “supply-demand fundamentals catch up with recent price action” – something that MS expects to happen. Prices have since continued to rise.
A consideration should be given to the Chinese National Development and Reform Commission having flagged it will closely monitor speculatory price increases and crack down on misleading information to inflate prices amid the metal’s rally this year.
MS Highlights
- The current rally is one of the faster bull markets seen
- This bull market is unique in the sense that it is not supported by tighter supply-demand fundamentals yet
- MS notes the current market is being driven primarily by sentiment/optimism, they still expect the iron ore market to tighten into 2Q.
- The previous 9 bull markets were all supported by either expanding Chinese steel production or tightening supply from the iron ore majors
“While China’s steel mills have been restocking ore recently, this is basically the first serious bull market that is mostly driven by sentiment/optimism, rather than an actual physically tightening market,” MS wrote.
“We believe that our average 2Q23 price target of $140/t – which implies 12% upside vs current spot and is comparable with 2Q22 – remains realistic. That said, we acknowledge the possibility of short-lived pull-backs”.
Source: Morgan Stanley
From the TradersCommunity Research Desk