Part of the increase in iron ore sales can be attributed to China relaxing its strict COVID-19 guidelines. The Asian superpower has a significant impact on the marketplace because of its high demand for steel which is used for the infrastructural development of the country.
Iron ore prices have also rebounded because of the tight supply resulting from the conflict between Russia and Ukraine. It’s important to note that Ukraine is the world’s fourth largest exporter of iron ore and that the country has the capacity to produce over 75 million tonnes (mt) of the material.
According to ANZ Research’s senior commodity strategist Daniel Hynes, “Ukraine’s output is only a fraction of the volumes exported by Australia (884mt in 2021), but it is enough to make an impact on a market with relatively low spare capacity. The war in Ukraine has squeezed this supply.”
Iron ore supply from India is also facing constraints because of the country’s raised export tax on the material. India had previously implemented a 45% export tax on iron pellets on May 22.
With top exporters failing to export adequate amounts of iron ore, the contribution of Australia and Brazil has grown. Australia is expected to produce at least 919mt of the material in 2022. In comparison, the country exported 872 mt of iron ore last year.
According to a Resources and Energy Quarterly March 2022 report, Australian producers have continued to be impacted by labor supply shortages in recent months. There are also potential threats to Australia’s production of the material, such as mining disruptions and cyclones in the western part of the country, which may interfere with operations.
Iron ore price analysis
Iron ore prices are expected to decrease in Q4 and into 2023 because iron ore demand is likely to weaken. Moreover, Australia’s industry ministry predicted that benchmark iron ore prices will average 80 USD per tonne in 2023 and will continue to drop by 15% per year. They are expected to reach 55 USD per tonne in 2027.
“This decline will come as a result of more modest growth in blast-furnace steelmaking (compared with the past decade) from major producers such as the EU, US and China as the world undergoes a transition to a low emissions environment,” stated the report.
China has invested heavily in public infrastructure along with focusing on facilitated domestic market integration and lower costs of production and transportation. These initiatives have helped China to compete with other well-performing countries around the world. China has one of the highest quality ratings for roads, railroads, ports, air transport, and electricity. They are also currently improving their 5G network, inter-city bullet railways, Artificial Intelligence, and development centers.
China seems to be keen on developing new infrastructure in order to solidify its domestic and international relations. The country has certainly earned the trust of its neighboring countries when it comes to infrastructure-based projects such as railroads.
According to Dr. Jonathan Sullivan, Director of the China Policy Institute at the University of Nottingham, “China has the capacity, the engineering skills, the ambition and money to achieve incredible things – the longest, deepest, highest, quickest – which the regime uses as a demonstration of progress towards modernity under its stewardship.”
Moreover, cities like Guangzhou, Shenzhen, and Shanghai (eastern area) have all emerged as technological and trade hubs used by different selling platforms such as Alibaba and Shopee. The country is looking to redistribute growth more evenly and to stimulate economic activity across its northern and western areas.
Last July, China set up a state infrastructure investment fund worth 500 billion yuan, or 74.69 billion USD, that aims to revive the country’s economy from the extensive lockdowns caused by the COVID-19 pandemic.
Is iron ore still a good investment?
We have seen that iron ore prices have been volatile for the past two years. The industry somehow recovered from this dip because of China’s steel demand. Iron ore can still be a good investment depending on one’s portfolio makeup, investment goals, and risk profile. However, the material’s prices might go down for the foreseeable future.
In February 2011, iron ore prices reached 187 USD dmt or dry metric tonne. This was around the time of the beginning of China’s multi-year campaign to modernize the country. Two years later, in 2013, the price slowly declined and eventually hit 40 USD dmt in December 2015.
According to different analysts and experts, the fall was possibly caused by two factors: China’s property market slowing down and the government deciding to stop the “shadow banking system”. Because of the unexpected decrease of iron ore demand, there was an excess of iron ore in inventories and it created a “supply glut”.
In July 2021, the industry was able to recover from the pandemic. It reached 200 USD dmt before collapsing again in the second half of the year. Commonwealth Bank of Australia (CBA) analysts predicted another 20% dip by 2023.
According to Dhar from The Australian Financial Review, “Industrial metal and iron ore prices remain beholden to Chinese policy. We anticipate that China’s COVID‑19 lockdowns will ease enough by [the second half of] 2022 to enable policy support measures to boost China’s demand impulse. Base metal prices should lift from [the third quarter of] 2022 to [the fourth quarter of] 2022 as a result. Our declining iron ore price profile indicates China’s plan to reduce steel output production this year. Steel production will likely need to be constrained later this year, echoing restrictions [imposed in 2021].”