There has rarely been a year like this.
Iron ore, a barometer of the Chinese economy and the engine of the Australian dollar, is probably having its wildest year. Prices rose to a record above $ 230 a tonne in May, fell to about $ 85 in November on the government’s promise to cut steel production, and have now recovered 50% in just six weeks.
Volatility is projected to persist into 2022, as a rebound in steel production this month falters early next year, and customary seasonal production restrictions tighten in the run-up to the Winter Olympics in February. . Beyond that, strong headwinds are building: China is making progress with cutting carbon emissions, steel production is expected to decline for a second year, while a debt-laden real estate sector is hurting consumption. steel and broader growth.
“Demand for iron ore will decline across the board and gradually,” said CITIC Futures Co. analyst Zeng Ning. “The property industry is quite weak, steel consumption is likely to contract and more mills will use scrap to reduce emissions.” The brokerage expects China’s steel production to drop 50 million tonnes in 2022.
The country buys about 70% of the world’s iron ore and is expected to produce 1.03 billion tonnes of steel this year, more than half of the world’s supply.
In terms of what this all means for prices, UBS Group AG expects iron ore to average $ 85 per tonne in 2022, while Citigroup Inc. is forecasting $ 96. Capital Economics Ltd. predicts $ 70 by the end of next year. Futures in Singapore have averaged $ 157 so far in 2021 and traded around $ 128 on Wednesday, a fifth day more.
On the positive side are possible fiscal stimulus in China, possible further easing of monetary policy and increased support for the real estate industry, while steel production could rebound when limits are removed after the Winter Olympics. . The Macquarie Group Ltd.’s view is that iron ore could rise in the first half of next year because current levels of steel production in China appear “unsustainably low.” Production in November fell to the lowest for the month since 2017.
Still, there are “a lot of uncertainties,” said Tomas Gutierrez, an analyst at Kallanish Commodities Ltd., who expects prices to trend below $ 100 next year. Global growth prospects are mixed, while inflationary pressures could arise from energy prices and supply disruptions. The omicron variant of the coronavirus, now detected in the country, is also a “dangerous variable considering China’s zero tolerance approach to Covid,” he said from Shanghai.
For major mining companies, lower prices mean “low margins, but still quite large,” Gutiérrez said. Smaller miners may need to consolidate, and projects that have resumed with high iron ore prices will likely have to close, adding to a number of projects closed this year. Mining costs can be as low as $ 15 per ton of iron ore, compared to prices that now exceed $ 100.
Still, the shares of some of the major mining companies have lost their luster this year. Rio Tinto Group and Fortescue Metals Group Ltd. are heading for annual losses of more than 10% in Sydney trading, which in Rio’s case represents the first drop since 2015. BHP Group is also currently in negative territory during the anus.
Australian miners could face higher costs and lower product prices next year, UBS analysts, including Lachlan Shaw, said in a note. The bank has a sell rating for Rio and Fortescue Metals, and a neutral rating for BHP.
Global iron ore shipments in 2022 will remain more or less stable starting this year, according to dry bulk tracker DBX Commodities. There is not much capacity available in Australia, while Brazil could see an increase in volumes as Vale SA tries to increase its operations, and India will see a drop in exports.
© 2021 Bloomberg