3 things for BHP, Rio Tinto and Fortescue investors to consider

Soaring iron ore futures has inspired a much needed three day rally for iron ore majors BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue (ASX: FMG).

Iron ore futures rallied 7.2% last week to US$102 a tonne after a lockdown-inspired selloff pushed prices below the symbolic US$100 level in the last week of August.

Still, iron ore prices are down -25% in the last three months and -15% year-to-date as the Chinese economy struggles to climb out of the property and lockdown-related rut.

Singapore iron ore futures (Source: TradingView)

As prices stage a small rebound, here are three things to consider.

#1 Peak restocking season

Steel output in China tends to pick up over the next two months amid peak construction and property sales season, known domestically as "Golden September, Silver October", according to Breakwave Advisors.

"In the short term, Chinese steel plants are expected to restock iron ore and coking coal during peak season as raw material inventories in steel mills are at a historical low," said Breakwave in a weekly note.

That said, "steel transaction volumes among major trading companies in China is at the bottom, indicating a lack confidence in hoarding steel before the aforementioned peak season."

#2 National Congress meeting

The 20th National Congress of the Chinese Communist Party meeting is scheduled for Sunday, 16 October.

"Under the most optimistic scenario, construction industries in southern China will grasp the last opportunity in 2022 by the coming winter. With the support from special purpose bonds and central government expenditure, they could step up infrastructure projects and boost steel demand," said Breakwave analysts.

China has room to introduce more stimulus from an inflationary standpoint, following a cooler-than-expected CPI print of 2.5% in August from 2.7% in July.

#3 Still-troubled property sector

China's aggregate financing for household medium and long-term new loans fell -53.6% year-to-date to August.

Likewise, combined contract sales among China's top 100 developers plummeted -39.7% year-on-year in July, according the China Real Estate Information Corp (CRIC).

If real estate sales are down approximately -40% year-on-year and the industry typically accounts for 30-40% of steel consumption, then that's an rather hefty haircut for iron ore demand.

Outlook

"We see limited upside for iron ore prices," said ANZ analysts in a note last Friday.

"A stabilisation in the Chinese property market should support sentiment and prices through Q3 and into year end."

"We expect prices to trend lower in Q4 and into 2023 as the impact of China's stimulus measures peter out and iron ore demand weakens."

The analysts expect prices to sit under US$100 a tonne by year end as "market tightness eases".