Iron Ore

Outlook for iron ore: OCE sees prices averaging US$110 a tonne in 2022

Tue 05 Apr 22, 4:21pm (AEST)
Iron Ore 1 Mining
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Key Points

  • The Office of the Chief economist expects iron ore prices to average US$110 a tonne in 2022
  • Prices are forecast to fall to US$80 a tonne next year
  • All eyes on whether or not China can buoy its real estate and infrastructure sectors

Iron ore is trending upwards towards the US$160 a tonne level - wedged right in between previous all-time highs of US$230/t and recent lows of US$80/t.

The massive rebound in 2022 reflects an improvement in China’s appetite for steel, ongoing Russia-Ukraine supply concerns and the expectation that China will unleash more accommodative policies to meet its economic growth targets.

In a quarterly resources and energy report, the Australian Government's commodity forecaster, the Office of the Chief Economist (OCE), reaffirmed a bearish view that iron ore prices will weaken over the short-to-medium term.

The OCE believes prices will average around US$110/t in 2022 and then projected to average US$80/t in 2023.

Over the outlook period to 2027, it forecasts prices to decline around -15% a year to reach US$55/t by 2027.

Iron ore price outlook

Without getting too wound up in longer-term price estimates, let's take a look at what the OCE thinks will dictate prices for the remainder of this year.

Chinese stimulus to buoy iron ore prices

China is opening the floodgates for more fiscal and monetary stimulus after a relatively tight stance throughout 2021.

China fiscal and monetary conditions

“China’s Central Government has announced an emphasis on infrastructure spending in 2022, with financing for over 100 mega projects to be frontloaded in the first half of the year,” the OCE report said. 

"Recent cuts to both the bank Reserve Ratio Requirement (RRR) and benchmark mortgage rate signal strong policymaker intent to stabilise the economy, after slowing growth conditions in the second half of 2021."

The flow on effects of infrastructure funding is expected to boost construction activity from the June quarter 2022. The infrastructure sector typically accounts for 20-25% of China's total steel consumption.

China’s property sector remains vulnerable

The continued weakness in China's residential property sector - which typically accounts for 35-40% of domestic steel consumption - remains a key risk to iron ore prices.

While Evergrande is no longer making headlines, Chinese property developers are showing increasing signs of financial distress and uncertainty in meeting debt deadlines.

The OCE observed that total new home sales across China's top 100 developers fell around -40% year-on-year in January and new land sales in the top 50 cities have plunged -80% over the same time period.

Supply on the rise 

The world's four largest iron ore exporters - Australia, Brazil, South Africa and Canada - shipped an estimated 1.35bn tonnes in 2021.

This was 1.6% higher than 2020 and 1.2% higher than 2018, which is the year the OCE considered to be the "last full year of unaffected global seaborne supply prior to the 2019 Brumadinho tailings dam collapse in Brazil."

Conversely, China's steel production is projected to remain flat around 1.03bn tonnes annually over the duration of the forecast period.

China steel production forecast

What to look out for

While the OCE report highlighted China's attempts to keep its economy intact, the risks seem to point towards the downside.

Late last week, China flagged that its factory activity declined at the fastest pace since March 2020 due to surging covid cases and lockdowns.

The Caixin/Markit Manufacturing Purchasing Managers' Index (PMI) fell to 48.1 in March, which indicates a steep rate of contraction.

Investors should keep a note of upcoming economic data and whether or not economic conditions continue to deteriorate.

Iron ore vs iron ore stocks
Iron ore vs. Fortescue (yellow), BHP (orange), Rio Tinto (blue). Source: TradingView, Annotations by Market Index

 

Written By

Kerry Sun

Finance Writer & Social Media

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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