Iron ore prices failed to rally in December. Here's why and what's next

Iron ore prices slipped around 3.5% in December - the first time the December price of the key steelmaking ingredient has seen a decline for a decade.

The following table, sourced from my previous article, observes the average, median and percentage of positive months between July 2014 and November 2024 for Singapore iron ore futures.

Source: Market Index, TradingView

This seasonal strength is typically underpinned by China's need to stock up on iron ore between periods November-February and June-July, in anticipation of the Lunar New Year and peak construction periods, which take place in September and October.

But this year was different.

A Weak December

Prices were relatively stable leading up to December, driven by positive sentiment towards China's economic policy announcements. However, prices dipped in December, with Singapore iron ore down 3.5% for the month to US$100.95 a tonne. This move was driven by a number of factors, including:

World steel production remained weak in 2024. In the nine months to September 2024, global steel production was 1.39 million tonnes, down 1.6% year-on-year, according to the Office of the Chief Economist. In October 2024, the World Steel Association downgraded its short-term steel demand outlook for most major economies due to persistent weakness in global manufacturing. Global steel demand is now forecast to fall 0.8% in 2024, or put another way, see a third straight year of declines.

Source: Department of Industry, Science and Resources

China's economic stimulus announcements undershot market expectations. In early November, the National People's Congress Standing Committee announced further policy adjustments, notably 6 trillion yuan in debt relief for local governments – Except the market was expecting a figure close to 10 trillion yuan.

China's property sector – which accounts for around 30% of China's steel demand – continues to deteriorate. New construction starts, which is the most steel-intensive stage of the construction progress, was down 22% in the year-to-September 2024.

Supply remains relatively sound. Australia and Brazil are the world's two largest iron ore producers, and forecast to collectively grow export volumes by 1.9% per annum in 2025-26, according to the office of the Chief Economist. This growth reflects a ramp up of greenfield projects by major Australia miners and Brazil's Vale.

Source: Department of Industry, Science and Resources

A strong US dollar. The US Dollar Index rallied 2.55% in December to a 13-month high. A strong US dollar makes commodities more expensive for buyers using other currencies, leading to lower global consumption and lower prices. Most commodities tend to have an inverse relationship with the US dollar.

US dollar index (Source: TradingView)

Conflicting Historical Data

"Arguably, the two most washed-out ETFs among the hundreds I follow are Materials (XLB) and Brazil (EWZ)," says Jason Goepfert, founder of SentimenTrader. The indicator he uses here is the McClellan Summation Index – a market breadth indicator based on stock advances and declines.

While the Materials Select Sector (XLB) is a US-based ETF – the underlying logic is pretty much the same for the local resources sector.

"Over the past 20 years, they essentially have a 100% win rate if holding for one year ... [But] both also tend to move inverse to the US dollar."

Source: SentimenTrader

Moving to January

January has historically been a relatively mixed month for iron ore prices – up an average 1.8% but positive only 40% of the time. And that summarises the situation we're in right now.

Currently, downward pressure dominates the market, driven by factors such as lacklustre manufacturing data, ongoing economic challenges in China and US dollar strength. However, potential catalysts could shift this trajectory, such as aggressive Chinese stimulus measures, cooler-than-expected inflation prints or sudden supply disruptions (these catalysts might end up as just wishful thinking).

Last month, Federal Reserve Chair Jerome Powell said more rate cuts in 2025 now hinge on further progress in lowering inflation. "I think we're in a good place, but I think from here it's a new phase and we're going to be cautious about further cuts," he said. These remarks sent stocks sharply lower, bond yields higher and pushed the US dollar to a fresh two-year high.

A few high profile catalysts to keep an eye out for over the next couple of months include:

Chinese New Year takes place on January 29 this year. Steel mills and traders often stockpile iron ore ahead of this date to ensure they have enough supply during the holiday period, when many mines, ports and logistics networks slow down. Will we see a short-term surge in demand this month?

The next batch of US inflation data is set to be released on January 15. The market is expecting headline inflation to fall from 2.7% in November to 2.3% in December, and core inflation to ease from 3.3% to 3.0%.

China’s top legislature will hold its annual meeting on March 5, where Beijing will set its growth target and outline plans to revive the stalled economy. Will these targets meet market expectations? Is there any stimulus that'll bring life back to the country's struggling property and construction sector?