Confidence test looms for iron ore price

The next three weeks will be crucial to iron ore’s fortunes as cash-strapped Chinese steel mills grapple with tight profit margins and a contracting domestic property sector.

That was the message from S&P Global Commodity Insights iron ore senior managing editor Niki Wang who warned the Middle Kingdom’s steel mills were barely breaking even and many of the nation’s local governments were laden with heavy debt.

But those warnings were tempered with sentiment medium- and low-grade ores from Australia were attractive in the current economic climate as they were cheaper to buy.

Speaking at Informa’s Global Iron Ore and Steel Conference in Perth this week following a trip to China, Ms Wang said unclear policy direction was sending mixed messages to steel buyers.

“(The) Chinese government announced one shilling bonds to support the infrastructure and active consumption in October 2023,” she said.

“However, in late January, China decided to suspend subway construction in 12 provinces to prevent and diffuse local government debt risk.

“The local governments of each province need some time to digest these messages before they could come up with more detailed plans.

“I think next two to three weeks might be the critical time to see whether the market could really restore the confidence and inject liquidity.”

Ms Wang said she expected S&P’s annual forecast for iron ore produced in February of $US118-per-tonne to be lowered.

The price for 63.5 per cent iron ore on Thursday morning was sitting at $US108-per-tonne.

On countries pivoting away from Chinese steel for ESG reasons, Ms Wang said the world should not discount China’s ability to find new customers to offset any losses.

On long-term forecasts, Wood Mackenzie iron ore research director David Cachot said Chinese demand for iron ore was expected to shrink 20 per cent by 2033 at the same time as substantial new supply from the likes of Rio Tinto’s Simandou mine in Guinea came online.

Mr Cachot said Brazilian giant Vale and Rio Tinto were forecast to boost trade over the next decade as they brought more high-grade iron ore online, while BHP and Fortescue’s seaborne trade was forecast to contract slightly.

High production costs, low quality reserves, and weak emissions profile meant domestic Chinese ore production was unlikely to increase, according to Wood Mackenzie’s research.