Strike while the iron is hot: Citi upgrades short-term iron ore price target to US$120 a tonne

The hype around easing restrictions in China and a potential reopening is real and that's been reflected in the 40% spike in Singapore iron ore futures over the past five weeks.

Prices for the steelmaking ingredient rallied aggressively from US$77.15 on 31 October to US$106.50 a tonne on Thursday. This has helped iron ore's performance look a little better from a medium-term perspective, up 4.5% in the last 12 months but down -12.4% year-to-date.

Singapore iron ore futures (Source: TradingView)

The resurgence has triggered some V-shaped rallies for local iron ore heavyweights BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue (ASX: FMG), whose shares are up a respective 25%, 31% and 42% over the same time period.

Believe it not, BHP is trading just 4% below its August 2021 all-time high of $48.57.

BHP chart (Source: TradingView)

Citi: Stay bullish on iron ore

Citi raised its 0-3 month iron ore forecast from US$110 to US$120 a tonne to reflect the view that China is making meaningful progress towards a reopening.

"From a portfolio perspective, we suggest that one of the best ways to gain exposure to China’s reopening sentiment in the near term is iron ore given its relatively high exposure to China," the analysts said in a note on Monday.

"Iron ore has traded more like a financial asset than a physical commodity due to the influence of bullish forward-looking investment flow."

In a bull scenario, the analysts said iron ore prices could rally as high as US$150 a tonne subject to the outcome of Beijing's Politburo meeting and potential credit easing.

Catalysts to consider

Citi told investors to stay bullish on iron ore 'while the music is still playing'. Some notable catalysts to watch out for include:

• China may announce 10 new covid easing steps on Wednesday, according to Reuters

• Beijing set an ambitious target to boost elderly vaccination rates (one dose) to 90% by late January

• Beijing is considering downgrading the severity of covid from a Category B infectious disease to a Category B management or even Category C

• China's top banks have stepped up offshore loans to help developers repay debt, which could push properties through to completion

Long-term remains cloudy

By the third quarter of 2023, Citi expects iron ore prices to ease to around US$100 a tonne.

In the absence of any major credit easing, the analysts said they expect 2023 to be no better than 2022" in terms of steel consumption. Furthermore, property starts, which is generally a leading indicator for steel demand, is forecast to fall -40% year-on-year.