The iron ore price rally looks unsustainable: Citi

Iron ore has been one of few commodities to stand tall amid global growth concerns and the US banking crisis, currently trading close to a 9-month high of US$130 a tonne. The recent strength reflects a seasonal increase in steel production, declining iron ore inventories at Chinese ports, and supply disruptions in Australia and Brazil.

Citi says iron ore prices are likely to remain in a tight range between US$120-130 a tonne over the next few weeks thanks to restocking efforts by Chinese steel mills. However, the outlook for the rest of the year remains cautious at best. 

“We suggest selling iron ore into further rallies as steel outlook for this year remains subdued as well as further price rally risks policy intervention,” said Citi.

The path of least resistance: Sell into strength

A seasonal recovery in demand has kept iron ore prices elevated and Citi expects this to remain the case as we head into peak construction season in China. However, the investment bank’s 6-12 month view is fraught with uncertainties and the path of least resistance appears to be the neutral-bearish one:

“We maintain a neutral-bearish stance amidst uncertainty around the strength of China’s economic rebound and believe steel consumption especially from the property sector is likely to remain subdued this year.”

“The implementation of government-led projects is driving a downstream demand recovery in raw materials from cement to steel products along with their seasonal recovery. However, recent datapoints point to an uneven recovery going forward.”

Citi pointed to two key areas of uncertainty, including:

• Cement shipments were up 6% week-on-week and 12.3% year-on-year for 8-14 March, reflecting a boost in construction activity as the country reopens. However, growth in cement demand for property construction started to slow over the last two weeks and existing projects with few new starts were the main drivers of the recent recovery

• China’s credit growth for February 2023 exceeded expectations, with total Jan-Feb credit data up 24% year-on-year. But new credit from the household sector was only 86bn yuan in February from 223bn in January, suggesting a patchy recovery

“In addition to this, possibility of steel output restrictions for the third consecutive year could dent demand for iron ore.”

The Chinese government has again cut its credit steel production in 2023 and prohibit any new steelmaking capacity, according to Bloomberg. However, an official announcement has yet to be made. 

Prices set to ease

Citi kept its 6-12 month price target for iron ore unchanged at US$105 a tonne – which suggests a downside of 19-23% from current levels.

Singapore iron ore futures (Source: TradingView)