China’s Growth Engine Declining: Iron Ore Too Not Very Bright

It’s been a year unlike any other. Iron ore, a…

It’s been a year unlike any other.

Iron ore, a leading indicator of the Chinese economy and a major driver of the Australian currency, is enjoying its wildest year ever. Prices soared to a high of more than $230 a tonne in May, plummeted to around $85 in November as a result of a government vow to cut steel production, and have now recovered 50 percent in just six weeks.

As a rebound in steel production this month falters early next year, the customary seasonal output limitations tighten in the run-up to the Winter Olympics in February, the instability is certain to continue into 2022. Aside from that, there are growing headwinds: China is accelerating its carbon-cutting efforts, steel output is forecast to fall for a second year, and the debt-ridden housing industry is impacting on steel demand and overall GDP.

“Iron ore demand will fall in a broad, progressive manner,” according to CITIC Futures Co. analyst Zeng Ning. “The property market is struggling, steel consumption is expected to fall, and more mills will turn to scrap to cut emissions.” China’s steel output is expected to drop by 50 million tonnes in 2022, according to the brokerage.

The country imports almost 70% of the world’s seaborne iron ore and is expected to produce 1.03 billion tonnes of steel this year, accounting for more than half of worldwide demand.

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In terms of what this means for prices, UBS Group AG predicts an average price of $85/tonne in 2022, while Citigroup Inc. predicts a price of $96. By the end of next year, Capital Economics Ltd. expects a price of $70. Singapore futures have averaged $157 so far in 2021 and were trading around $126 on Wednesday.

Potential fiscal stimulus in China, greater relaxing of monetary policy, and additional support for the property industry are among the bright spots, while steel output could rebound after the Winter Olympics are over. Because China’s present steel output levels appear “unsustainably low,” Macquarie Group Ltd. believes iron ore prices will go up in the first half of next year. In November, output dropped to its lowest level since 2017.

‘Dangerous Variable’ is a term used to describe a variable that is potentially dangerous.

Still, there are “many unknowns,” according to Tomas Gutierrez, an analyst in this sector, who believes prices will go below $100 next year. The global growth forecast is mixed, and energy costs and supply disruptions might lead to inflationary pressures. In light of China’s zero-tolerance stance to Covid, the omicron variation of the coronavirus, which has been found in the country, is also a “dangerous variable,” he added from Shanghai.

Lower prices mean “reduced — but still pretty big — profits” for the main mining companies, according to Gutierrez. Smaller mines may need to merge, and operations that have reopened due to high iron ore prices will almost certainly have to close, adding to the list of projects that have closed this year. Iron ore may be mined for as little as $15 per tonne, compared to current pricing of considerably over $100.

Nonetheless, some large mining companies’ stocks have lost their luster this year. In the Sydney trade, Rio Tinto Group and Fortescue Metals Group Ltd. are on track for annual losses of more than 10%, signifying Rio’s first decrease since 2015. BHP Group’s year-to-date performance is similarly in the red.

In a report, UBS analysts, including Lachlan Shaw, predicted that Australian miners would face increased expenses and lower output prices next year. Rio Tinto and Fortescue Metals have a sell rating from the bank, while BHP has a neutral rating.

According to dry bulk tracker DBX Commodities, global iron ore shipments in 2022 will mostly remain unchanged from this year. Australia has little spare capacity, while Brazil’s volumes may increase as Vale SA attempts to speed up operations, and India’s exports will decline.

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