Morgan Stanley says there is further downside for iron ore prices in the second half of 2023 and expects prices to ease to US$90 a tonne by the December quarter.
Singapore iron ore futures fell 1.25% last week to US$108 a tonne amid a seasonal slowdown in China’s steel production and surging iron ore shipments.
Iron ore stocks have been relatively range bound year-to-date as expectations of more stimulus from China has eased ongoing demand concerns. Fortescue (ASX: FMG) has outperformed its peers BHP (ASX: BHP) and Rio Tinto (ASX: RIO), up 6.6% year-to-date while the others are both down around 3% in 2023.
In this piece, we’ll recap some of the investment bank’s key trends and data points for the steelmaking ingredient.
Iron ore prices typically rise in the first half of the year due to China’s seasonal construction period and weather disruptions. Conversely, China’s steel production typically slows down in the second half, which applies downward pressure on iron ore.
“While any headlines around China stimulus could provide temporary iron ore price support, we are seeing signs that the usual asymmetry could be returning once again,” said Morgan Stanley.
The four-week moving average of iron ore shipments from Australia, Brazil and South Africa – which account for more than 80% of the seaborne iron ore market – hit a record high in June.
“There is typically a strong asymmetry to these shipments, with disruptions from heavy rains/cyclones in 1H before a 2H recovery - in the last two years, the four majors have shipped 54 mln tonnes more in 2H vs 1H,” noted the analysts.
“In particular, Brazil has rebounded strongly, up 60% since January where stronger rainfall disrupted shipments, with Vale shipments up 32% compared to levels early-May.”
China has been reducing its steel output by an average 2-3% since 2020, according to Morgan Stanley.
“For 2023, sources suggest output flat to down 2.5%. So far, China’s steel output is up 1% year-to-date, and to achieve a -0.5% reduction, output would need to average 10% below May levels for the remainder of the year,” the analysts said.
“China's steel output swings have historically been followed by similar directional moves in iron ore pricing.”
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