Iron ore price to hit US$70 by 2024: Office of the Chief Economist

Iron ore prices fell around -12% last week, down to fresh year-to-date lows of US$114 a tonne after China’s steel PMIs hit levels not seen since the 2008 Global Financial Crisis. 

The sharp declines has erased the V-shaped rebound for BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue (ASX: FMG), pushing them towards fresh year-to-date lows. 

The Office of Chief Economist (OCE) has just published its June quarter resources and energy report. Unsurprisingly, the government’s commodity forecaster expects iron ore prices to average around US$115 a tonne in 2022 and weaken to around US$85 in 2023.

Let’s break down some of the OCE’s commentary and forecasts. 

Stable June quarter

Iron ore prices remained relatively stable in the June quarter, averaging around US$130 a tonne.

The rebound in prices 2022 was supported by a “partial improvement in monthly steel output in China, as well as the expectation of a substantial boost in infrastructure-related construction activity this year,” said OCE analysts including Andrew Nash. 

Source: Office of the Chief Economist Resources and Energy Quarterly: June 2022

“China’s authorities are expected to introduce further stimulatory fiscal and monetary policies in the second-half of 2022 - with an emphasis on infrastructure-related stimulus,” the report said. 

Industrial activity and steel output in the June quarter fell short of expectations amid new covid outbreaks and containment measures. These restrictions “appear likely to delay this upturn until the second-half of 2022,” said OCE. 

Supply shocks possible

Near-term supply shocks to iron ore markets could support prices in 2022. The OCE flagged potential disruptions to production and export markets coming from:

• World’s two largest iron ore producers - Australia and Brazil - March quarter production fell -2.3% quarter-on-quarter

• Severe weather in Pilbara in May (record rainfall) and trends could see more rainfall in northern Australia

• Australian miners flagging ongoing labour shortages

• Russia and Ukraine expected to tighten iron ore markets 

  • For context, both countries exported approximately 70m tonnes in 2021, worth around 1 month of Australian export volumes

• Indian government introducing a 50% tax on exports of iron ore to boost domestic steel output

Near-term outlook

The OCE expects easing credit conditions and new infrastructure investment to provide some support for iron ore prices for the rest of 2022.

However, analysts noted that "this is likely to be offset by further weakness in China's residential property sector, with new housing starts and home sales continuing to fall by double digits year-on-year in May."

Iron ore to hit US$70 by 2024

The OCE forecasts iron ore prices to decline to lower "long-run levels", with prices to average US$85 in 2023 and US$70 in 2024.

Factors including new supply from major Australian producers, a recovery in Brazilian supply and softer demand is expected to put downward pressure on prices.

Source: Office of the Chief Economist Resources and Energy Quarterly: June 2022