Three reasons why iron ore price increases are unlikely
Iron ore prices, which have slumped because of weak demand from China, are unlikely to recover in the coming months, MEPS analysis indicates.
Iron ore prices were trading above USD140 per tonne in early January but have since declined by 20%. Despite hopes of further economic stimulus measures from the Chinese government, persistently weak construction sector activity, inconsistent manufacturing demand and excess supply should keep iron ore prices subdued for the remainder of the year.
MEPS International data analyst Ewan Gilfillan said: "While there is always the possibility that the Chinese economy can be boosted by stimulus measures, MEPS's analysis suggests that subdued steel demand is likely to persist in the near term, reducing iron ore consumption.
“In combination with the material already stockpiled at Chinese ports, this is likely to maintain iron ore prices at their new, lower level."
Property sector’s weak foundations
The Chinese property sector, a major consumer of domestically produced steel, remains in financial difficulty. In the January to May period, the total accumulated floor space of buildings under construction was down by more than 10% year-on-year. Investment in the sector has fallen by around 10% over the same period. This means it is unlikely that building activity will improve in the short term.
Speculation about potential government stimulus packages, aimed at supporting the property market, often applies upward pressure to iron ore prices. The People’s Bank of China lowered its one-year and five-year loan prime rates in September 2023 and February 2024, respectively. Both rates are important in determining the cost of mortgages.
In May, the Chinese government also revealed new rules, including lowering deposit requirements for home buyers and the provision of cash for local authorities to purchase unsold homes, as it attempted to revive the real estate sector.
Despite these measures, property prices have fallen through much of 2024. Moreover, GDP growth for the second quarter fell to 4.7% year-on-year, down from 5.3% year-on-year for the January to March period. Nevertheless, analysts polled by FactSet have maintained their annual GDP growth forecasts at 5% for 2024.
Mixed signals in the manufacturing sector
In response to poor steel consumption in the construction sector, Chinese service centres are diverting sales to manufacturers. However, demand from China’s manufacturing sector is also inconsistent.
Industrial output increased 5.6% year-on-year in May, but this was below the expectations of analysts polled by FactSet, who initially predicted a figure of 6.2%. While maintaining growth, output slowed further, to 5.3%, in June.
The manufacturing purchasing managers’ index released by the National Bureau of Statistics China has indicated a mixed outlook for demand from the sector. It has been below 50 points four times in the first six months of this year. A figure below 50 means the sector is in decline. Analysis of the underlying data which makes up the index reveals that order backlogs have been contracting throughout this year.
Overstocked Chinese ports
Weak iron ore consumption has led to a glut of material at Chinese ports, which is exerting further downward pressure on prices. Data compiled by FactSet showed that inventories are currently at 149 million tonnes, the highest level in over two years.
Some market participants suggested earlier in the year that mills were stockpiling ahead of an increase in activity in the summer. According to China Customs data, the total volume of iron ore imports in the first five months of 2024 rose by nearly 7% year-on-year, to over 510 million tonnes.
However, melt shop output is low. The latest figures from worldsteel show that Chinese crude steel production fell by 1.4% in the first five months of the year.
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International Steel Review
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