Why Citi thinks iron ore prices could hit US$150 a tonne

Iron ore prices fell around 6.5% in January to US$125 a tonne, marking an end to a rather unexpected rally that defied expectations of sluggish demand from China.

Prices for the steelmaking ingredient rallied around 30% between August 2023 lows of US$107 a tonne to US$139 a tonne by year end. If the rally extended for one more month – It would have marked one of the longest monthly streaks in history.

But one bad month does not mean the rally is over. Citi analysts believe there are plenty of reasons to remain "tactically bullish" on near-term iron ore prices.

"China's policy support remained behind the curve faced with the domestic equity market rout further weighing on market confidence," the analysts said, adding that "we see risk to prices skewed to the upside in the next few months as China's policy momentum could reaccelerate towards the March National People's Congress meeting and particularly if fiscal stimulus were to be front loaded."

Citi maintained its 0-3 month price target of US$150 a tonne or 20% upside from Tuesday's close of US$125 a tonne.

"Meanwhile, iron ore fundamentals could improve post Chinese New Year as mills will resume production supporting iron ore demand," says Citi.

Revisiting November's Call

On 22 November 2023, Citi upgraded its 3-month price forecast for iron ore to US$140 a tonne. One of my favourite takeaways from the note was the line about: “Any dip in iron ore from here through to at least Chinese New Year could represent a buying opportunity."

Fortescue (ASX: FMG) shares experienced a 3-4% pullback between 22 November and 29 November 2023 but continued its V-shaped rally in December, up around 20% to all-time highs.

Fortescue daily chart (Source: TradingView)

Downward pressure

Over the next 6-12 months, iron ore prices are anticipated to trickle back down to US$100 a tonne as the market tips into a "modest surplus".

"We see the iron ore market to remain in small surplus this year as well next. The market however remains susceptible to disruptions due to weather as well as operational reasons," says Citi.

"Supply is likely to be broadly flat to down this year as we expect some swing supply could exit towards the later part of the year as we expect prices to eventually decline to US$100 a tonne by the third quarter of 2023."

The forecast is exposed to a number of uncertainties regarding supply as well as the size and timing of Chinese stimulus. Citi's base case expects a push towards fiscal support to "engineer an investment-led stabilisation ... to cushion the weakness in the commodity housing."

But a scenario that involves larger-than-expected stimulus could translate to stronger China steel demand and lead to upward pressure on iron ore prices.

Putting it all together: Iron ore prices are forecast to remain resilient in the near term on expectations of policy momentum from China and higher demand post Chinese New Year. Over the next 6-12 months, the market is expected to tip into a surplus (as opposed to small deficits in 2022-23). In the absence of meaningful stimulus and improvements in steel demand as well as supply shocks, prices are expected to drift lower towards the US$100 mark.