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Bulk Buys: The big banks are falling out of love with iron ore but China’s steel may still be strong in 2022

Bulk Buys: The big banks are falling out of love with iron ore but China’s steel may still be strong in 2022

Iron ore has been unpredictable in 2021 and it would be a brave person to make a hard and fast call on where it will end up in 2022.

In fact, with the whims of the Chinese Communist Party and vagaries of its economy one of the major factors in the outcome, it would be a foolish person to play this particular game of pin the tail on the donkey and claim victory before pulling off the blindfold.

In the past week we’ve seen, as has been the case often this year, a string of contradictory signals for iron ore prices.

Evergrande and Kaisa’s defaults – red light. China relaxing lending restrictions – green. Port stocks rising to near record levels – red. Producers in Australia and Brazil falling short on supply – green.

Our big banks have turned bearish on iron ore despite a recent run that saw benchmark 62% fines rise from a 12 month low of US$87.27/t on November 19 to US$114.20/t on Monday according to Fastmarkets MB.

Those moves have seen major iron ore stocks go on a mini-run. BHP (ASX:BHP) is up 10.2% over the past month to $41.28, Fortescue (ASX:FMG) has climbed 17.31% to $18.70, Rio Tinto (ASX:RIO) is up 6.82% to $98.10 and MinRes (ASX:MIN), which is also exposed to lithium, is 20.01% up at $49.41.

ANZ and Westpac were the latest to update their 2022 forecasts, with Westpac predicting iron ore will trade at US$75/t by the end of 2022 (down from previous estimates of US$82/t), a potential multi-billion dollar hit to the WA and Australian budgets.

“High prices are often a cure of high prices as they spur on production and reductions in demand, even more so when technological changes increase demand elasticity,” Westpac senior economist Justin Smirk said.

“Iron ore is set to continue its drift down to US$75/t by end 2022 while the weather induced shocks to Australian coal exports will be short lived with coal prices set to fall between 24% and 33%.”


Will the Beijing Olympics be the stop gap for falling steel production?

Many analysts view the Beijing Olympics in February as a key turning point for the steel market.

In the first half of 2021 Chinese steel producers making super high margins produced almost 600Mt of crude steel, driving iron ore to record prices above US$230/t in May.

China put the clamps on steel production on environmental grounds, both for its broader climate reduction aims and to beautify the Beijing skyline before the world’s eyes turn to the capital for the Olympic Games.

By October iron ore miners were staring nervously at a price cliff as steel production had sunk to its lowest level in 3.5 years and November’s official numbers could be even worse.

MySteel reported this week that in the first 10 days of December, mills it tracks delivered just 2.36 million tonnes per day, the lowest since the consultancy’s survey began in January 2018.

But there is broader positivity in the market with last week’s Evergrande collapse barely registering for traders despite the property market’s ~30% share of downstream steel demand.

Futures have consistently traded up in recent weeks on reports of higher steel profit margins and proposed measures to accelerate the pace of Chinese economic growth from its political leaders.

What those traders are betting on is what the market will look like in 2022.

Fitch Ratings thinks production will fall next year on an annual basis, but still predicts China will produce around a billion tonnes of steel. If it does it would be only the third time that has happened after 2020 and (we assume) 2021. That still makes for a strong market in the near term.

Fitch thinks production could be 30Mt lower than normal in the first quarter due to the Olympics. One important question is whether that will be the turning point for steel restrictions so many in the iron ore business hope.

ANZ thinks iron ore will average US$110/t in the March quarter before dropping to US$90/t in June, US$87/t in September and US$85/t by the end of 2022, falling again to US$80/t in 2023.

Their economists Daniel Hynes and Soni Kumari say the Beijing Olympics may not be the light at the end of tunnel some hope for and see demand weakening amid constraints on steel output.

“We don’t expect the Olympic-induced restrictions to completely give way once again to unbridled growth,” they wrote.

“With China targeting peak emissions by 2030, curbs on the steel sector are seen as the easiest way of reaching that goal.

“The industry singularly accounts for nearly 46% of total industrial emissions and 13% of total carbon emissions.

“The 14th Five-Year Plan (2021-2025) included measures to curb emissions and make the sector more energy efficient. Following the edict to limit to crude steel production of 1,000Mt in 2021, we expect pressure to contain output will remain in 2022.”

On the other hand, Hynes and Kumari see China’s iron ore market moving back into a 30Mt deficit in December, saying “supply constraints combined with a stabilisation in China’s property sector should limit the downside.”


Pilbara majors, Vale see output slide

On those supply constraints, the past week saw challenges for both Australian and Brazilian iron ore producers.

Data collated by DBX Commodities showed from December 6-12 Australia’s iron ore loads fell 11% to 17.05Mt, with Brazilian loadings sliding 41% to 4.54Mt.

Efforts to ramp up supply amongst the major miners have proven relatively unsuccessful this year.

Westpac’s Smirk said this could keep a demand base to support iron ore prices, although he pointed to high port inventories in China as an issue for the industry.

“You could put together a stronger argument for iron ore based on demand finding a base, PBoC stimulus backing up the administration’s call for an expansion of domestic demand including “pushing forward social housing construction”,” he said.

“In addition, ore supply has been trimmed with Vale, Rio, Anglo (American) and Mineral Resources all reducing guidance in recent weeks.

“However, we feel it is to too early to call a base with port inventories building rapidly and prices holding above cost.

While we think most of the price correction has already occurred there is still significant downside risk before there is meaningful cost support/supply discipline from the majors.

“The iron ore port inventories build through recent weeks is a bearish signal and they are expected to continue to lift over the next 2-3 months as pig iron production is not likely to pick up until after the Winter Olympics.”

Source: Stockhead

Dec 15, 2021 13:18
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