Comparing iron ore rallies and why the current one can continue: Morgan Stanley

About 10 days ago, I covered Morgan Stanley’s note on iron ore where they talked about China Minerals Resources Group (CMRG) – the Chinese government’s new central buying function for iron ore.

Morning Stanley (MS) is out with a fresh note, talking about why they still expect a tighter iron ore market in the months ahead, which should push the current rally into 2Q23.

MS also compares iron ore’s past bull market from peak to trough, since the inception of spot pricing, which can be seen below.

Source: Morgan Stanley

In the note, MS clearly 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.  

With respect to the chart above, MS highlights the following;

• The current rally is one of the faster bull markets they have seen

• This bull market is unique in the sense that it is not supported by tighter supply-demand fundamentals yet

• The previous 9 bull markets MS looked at 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. 

Tightening conditions

Whilst MS notes that the current market is being driven primarily by sentiment/optimism, they still expect the iron ore market to tighten into 2Q. 

Why? China’s steel production seasonally improves by March/April, and there are some signs of seasonal supply disruptions (which could drive up the price). 

The rainy season appears to be hurting Brazil’s iron ore shipments, which were down 20% year on year in the first two weeks of 2023.

GDP considerations

The other factor to provide support for prices is China’s 5%+ GDP target. 

If China’s steel mills maintain their current output through all of 2023, total output would be down 7% for the year – making the 5% target pretty much impossible. There are serious doubts the Chinese government would let that happen.

So, there you have it—Morgan Stanley’s bull case for iron ore and why they think the current rally can continue. 

What price are the team pencilling in?

“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”.