Materials

Dismal steel outlook puts downward pressure on iron ore stocks

By Market Index
Tue 01 Nov 22, 2:51pm (AEST)
Steel
Source: Unsplash

Key Points

  • Iron ore price forecast to fall to US$73 in the December 2023 quarter
  • Underlying weakness in the iron ore price is being attributed to underwhelming factory data in China within what is typically the steel sector’s busiest season
  • ASX-listed iron ore stocks were up single-digits today

The fortunes of iron ore stocks, which have been unravelling since the raw material for steel hit the lofty heights of around US$220.00 a tonne in July 2021, appear destined to range trade following a bleak December quarter outlook.

In light of a threatening global recession and rising interest rates, Capital Economics expects already soft steel demand from both the construction and auto sectors to weaken further.

Despite the glimmer of infrastructure spending rising in China due to government incentives, the economics forecaster concludes that the prospects for steel demand in the middle kingdom remain subdued, especially while the challenges confronting the country’s residential sector appear somewhat entrenched.

With China’s steel PMI for October flagging a material contraction of output, iron ore futures have tumbled (to US$75 a tonne) to less than half their year-to-date peak.

Iron ore hits near-2019 lows

Much of yesterday’s continued fall in the iron ore price, which shed around -7% to near early 2019 lows, can be attributed to continued underwhelming factory data in China within what is typically the steel sector’s busiest season.

With China’s official gauge of factory activity for October missing estimates, the iron ore price is expected to continue losing ground until there are signs of a sustainable recovery by China’s steelmakers.

What’s exacerbating an unprecedent softening in steel demand are both China’s ongoing property crisis, plus covid-zero measures that have compounded the headwinds confronting the country’s construction sector.

With China’s ports currently holding around their five-year average, Capital foresees lower imports in 2023 as domestic steel output progressively eases back.

The economics forecaster predicts spot price of iron ore at US$90 a tonne in the December quarter.

Looking beyond this year, Capital’s 2023 quarterly forecasts include:

  • US$88 in the March quarter

  • US$83 in the June quarter

  • US$78 in the September quarter

  • US$73 in the December quarter

How have the iron ore stocks fared today?

After mirroring falls in the iron ore price - which plunged to its lowest level since 2020 - on Friday, iron ore stocks were up in early afternoon trading, with the iron ore price steady at US$77.78 a tonne.

Stock Code

Company

Year-to-date high

Today's increase

Current price

Consensus

BHP

BHP Group

$47.37

1.74%

$38.01

Moderate Buy

FMG

Fortescue Metals Group

$22.83

3.71%

$15.24

Sell

RIO

Rio Tinto

$127.85

1.93%

$89.90

Moderate Buy

CIA

Champion Iron

$8.06

2.24%

$4.78

Strong Buy

 

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