As I have warned since this rally began, seasonal iron ore price tailwinds generally run through March. Goldman has a new report outlining these and one other bullish factor: steel mills’ ore inventories. I maintain that the best part of the rally is done but this argument is more than fair.
Seasonal squeeze despite property pain. Iron ore has outperformed the rest of the metals complex this past quarter, rallying 50% from its October trough of $78/t. While part of this move has been driven by the shift in positioning, due to China’s reopening, it has been reinforced by a pocket of tightness onshore, in contrast to copper and aluminium. Since early Q4, onshore iron ore inventories have fallen 45Mt (-15%) to close to 100Mt lower y/y (-30%), the lowest level since December 2016. This spot tightness is being compounded by what we believe will be a large H1-23 deficit (43Mt), and a more acute Q2 imbalance (35Mt deficit). It is important to understand that this expected squeeze is more a function of seasonal patterns, accelerating steel production and sluggish seaborne supply, than a structural change to our China property assumptions. As a result, whilst this seasonal squeeze supports near-term iron ore price strength, we do not see an extension to this tightening phase into a more extended bull story (as was the case from 2020-21). Instead, we see the iron ore balance swinging back into a clear surplus by H2-23 (56Mt surplus) which should continue through 2024 (64Mt surplus). With no green shoots of a broader revival in China’s property sector, and lacking the offsetting green technology leverage of copper and aluminium, a return to the 2021 high’s above $200/t is improbable in our view, absent a shock to seaborne iron ore supply. In this context, in-line with our recently upgraded forecasts, for 62% iron ore we
hold 3/6M price targets of $150/135/t and a full year average $120/t.
Fundamentals supportive into Q2. It is nonetheless important to recognise that iron ore possesses one of the most supportive fundamental setups into Q2 across the industrial metals. We see three key factors contributing to a sharp tightening swing in the balance to underpin a Q2 deficit. First, the positive seasonality of China’s steel production in March/April which should generate an upswing in iron ore demand. Onshore steel mills have already ramped blast furnace utilisation rates in February from January, with additional new capacity ramping up over H1, a further support. Crucially we see a less intrusive policy environment this year on steel supply onshore – versus the mandated cuts in 2021 – given an economic incentive for local governments to encourage local output, aided by improved air quality. Second, whilst China’s domestic steel demand remains sluggish, export demand has accelerated sharply. Following significant steel price increases in the West, alongside the loss of Turkish steel supply, this has generated a strong bid for China’s lowest-priced steel. Export orders, particularly on the flat steel side, have surged higher year to date. Third, these increments take place in a setting of extremely raw material-destocked Chinese mills, with currently just 18 days of iron ore coverage, the lowest since 2017. This offers a significant right tail skew to the onshore iron ore stock cycle this year, likely providing a powerful amplifier to near-term price upside as supply chain confidence stimulates restocking appetite.
