Near-term iron ore prices to stay high but upside remains limited: Macquarie

Iron ore prices have recklessly rallied to a four-month high of around US$110 a tonne, contrary to the deteriorating macroeconomic backdrop and a steep downturn for global steel users.

Singapore iron ore futures rallied almost 50% from US$77.2 a tonne to US$112.4 between Monday, 31 October and Friday, 9 December.

Since the peak, prices are on a three-day losing streak, down -3.1% to US$108 a tonne. But that's perhaps an understandable pullback after such an outsized rally.

Singapore iron ore futures (Source: TradingView)

Is iron ore getting ahead of itself?

Macquarie's commodity strategy team recently upgraded their near-term iron ore outlook, with the view that prices will average US$110 in the first quarter of 2023 (up from US$90) and US$114 for the full year. Though, the analysts explained that the recent price rise was boosted by sentiment, not fundamentals.

"The benchmark iron-ore prices continued to rise reflecting improving market sentiment despite the lack of support from iron-ore demand and supply fundamentals," the analysts said in a note on Tuesday.

"In China, steel apparent demand stabilised last week, but steel margins remained negative for both integrated and EAF mills, and steel inventories edged higher."

All things considered, the analysts expect to see limited price upside in the near term.

Charts to watch

Chinese rebar and hot rolled coil margins have returned to positive territory. Since April, the return to profitability has been rather short-lived.

Source: Macquarie Research

Macquarie forecasts multiple years of iron ore surpluses and does not expect prices to return to 2021 highs anytime soon.

Source: Macquarie Research

Iron ore stocks coverage

Source: Macquarie Research | Table: Market Index