Morgan Stanley sees further downside for iron ore prices in 2023

Iron ore has staged a rather dramatic selloff from US$125/t at the end of March to US$100/t by Wednesday, 3 May. Over the same time frame, iron ore heavyweights Fortescue (ASX: FMG), BHP (ASX: BHP) and Rio Tinto (ASX: RIO) are down 11%, 8.4% and 9.5% respectively.

Iron ore performance over the last 12-months (Source: TradingView)

“The catalyst of this correction was China's steel production catching up with the reality of sluggish underlying demand,” Morgan Stanley said in a note on Wednesday.

A strong start to 2023 begins to fade

“After a strong start of the year (up +7% year-on-year in 1Q23), China's steel production is slowing now, as also evidenced by the declining blast furnace utilisation rate,” said Morgan Stanley.

“The first steel production cuts are coming through, ending China's peak steel output season about a month earlier than it did during the last two years.”

China’s blast furnace utilisation rate – which measures the extent to which furnaces are producing steel from iron ore – has traditionally peaked around June.

China's blast furnace utilisation rates (Source: Morgan Stanley Research)

China has demonstrated mixed property related data so far this year, with new home sales rising at the fastest pace in 21 months in March but new starts measured by square metres, down 7% quarter-on-quarter and 19% year-on-year in the March quarter 2023.

Themes to watch

Steel curbs: Nothing has been confirmed yet but the Chinese government appears to want to cap this year’s steel output at the 2022 level – “All else equal, this would mean that China’s iron ore consumption would slow by 230Mt on an annualised run-rate basis.”

Steel inventories: “The last few remaining iron ore bulls point out that ore inventories at China's mills remain precariously low, but we question why a large restock would be needed with production cuts on the horizon.”

More supply: Morgan Stanley points to several catalysts for improving iron ore supply, including the ramp up of Fortescue’s 22Mtpa Iron Bridge mine, China’s NDRC looking to produce 370Mt of domestic iron ore by 2025 and India returning to the seaborne market after lifting export duties in late 2022. 

What the rest of the year looks like 

“As more steel production cuts are still required and supply ramps seasonally, the iron ore price is likely to continue to trend lower, just as it did in 2022 when it reached a low of $80/t in October,” the analysts warned.

“We see the potential for a looser market in 2H23 than during 2H22, if China's domestic supply proves sticky.”

Morgan Stanley sees more downside risk in the second half, forecasting average prices of US$110 in the third quarter and US$90 in the fourth quarter.