Iron ore prices have exploded 50% in five months. Here’s what the rest of 2023 might look like.

Iron ore prices are forecast to average around US$100 a tonne in 2023, according to the Australian government’s commodity forecaster, the Office of the Chief Economist (OCE).

“Risks to this global demand recovery remained skewed to the downside, with a more pronounced global economic slowdown risking further weak conditions in the steelmaking sector,” the OCE warned in its March quarter report.

The story so far: A V-shaped move

Iron ore’s price action has not been for the faint hearted, with prices halving between March to November 2022 and then rallying around 50% from November lows of around US$80 to US$125 by the end of the March quarter 2023.

“In China, renewed outbreaks of the pandemic from March last year saw the country implement a dynamic zero-COVID policy which drastically curbed economic and industrial activity through much of 2022,” the OCE said.

“Weaker steel demand prompted a 1.6% fall in China’s iron ore imports in 2022.”

Source: Resources and Energy quarterly

What will drive iron ore 2023: All things China

The narrative for iron ore in 2023 is all the return to normal for the Chinese economy. Here are some of OCE’s key points: 

• China’s infrastructure plans: The Chinese government allocated 6.8 trillion yuan (~US$1 trillion) of funds available for construction and infrastructure projects in 2022. The OCE says the rollout of infrastructure investment and new government policies are expected to “support construction activity, and steel and iron ore demand in China through 2023.”

• Restocking inventories: “Reported inventories in Chinese steel mills remained low compared with previous years. And in preparation for the post-Lunar holiday ramp up in steel production, steel mills have reported increased purchases of iron ore in recent months.”

• Seasonal ramp up: March and June quarters represent the typical ramp up periods for Chinese steel production. This will be supported by improved profit margins for steel mills. The “average margins turned positive for Chinese steelmakers in early 2023. And the lifting of winter production curbs … should also boost ferrous demand in the next few months.”

• Ex-China recovery: Steelmaking outside of China is expected to make a “moderate recovery in 2023 – following a 5.7% fall year-on-year in 2022 … This is expected to include a rise in iron ore imports for major purchases in Europe, East and South East Asia and the Middle East, with blast furnace steelmaking output forecast to rise close to 6% in 2023.” 

2023 and beyond: Prices set to ease significantly

Iron ore prices are forecast to ease from around US$100 a tonne in 2023 to US$63 a tonne by 2028 as a number of structural changes in China reels in steel demand.

“The foremost of these is China’s stated aim to reach peak steel output by 2030, with the country expected to achieve this within the next few years,” the OCE said.

“China also faces a falling total (and working age) population, with the country announcing its first decline in population in over six decades in 2022.”

“This is expected to see China’s iron ore demand decline by around 1% annually over the outlook period to 2028.”

At the same time, supply from the world’s two largest producers – Australia and Brazil – is forecast to rise by 3.2% per annum over the outlook period.

Source: Resources and energy quarterly