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Chinese iron ore demand to decline

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Fitch Solutions expects iron ore prices to ease in the short-term as supply improves and demand growth slows.

There was an iron ore rally across the first half of 2021 with prices breaking historical records in May, reaching $US239 ($325) per tonne at one stage.

At the time of writing, prices were hovering around $US175 per tonne, however Fitch expects that to continue to decline with predictions iron ore will be trading at $US130 during the 2022 financial year, $US100 by the 2023 financial year before dropping to $US75 by the 2025 financial year.

Much of the recent iron ore boom is due to Chinese demand, stemming from the country’s V-shaped COVID-19 economic recovery and its government’s zeal to boost infrastructure and construction.

Fitch believes this demand peaked in the first half of 2021, in conjunction with China’s peak seasonal construction activity in May-June.

However, as construction projects reach completion and the prospect of future projects lessen, iron ore demand is forecast to begin a noticeable decline from late 2021.

The strength of iron ore prices up to this point are represented by record production levels on the ground.

BHP produced a record 252 million tonnes of iron ore at its Western Australia Iron Ore (WAIO) sites in the 2021 financial year, marking a 1 per cent increase from the previous year, while total iron ore production increased by 2 per cent to 253.5 million tonnes.

Fortescue Metals Group also benefited from the iron ore rush. The company broke iron ore shipment records for the 2020-21 financial year, with a record 182.2 million tonnes exported from the Pilbara in the 12 months to June 30.

While Fitch forecasts iron ore price drops going forward, they expect domestic iron ore production to increase.

Nevertheless, China isn’t expected to be the players they once were, with the country’s import dependency set to decrease, heightened by the country’s frosty diplomatic relations with Australia.

A report from global firm UBS stated that China’s flat steel production has led to a price decrease.

Chinese steel producers have signalled plans to cut production, which has resulted in mills restocking and a weaker iron ore price.

“We expect the China’s steel curtailments to be targeted in fourth quarter when demand slows seasonally and air pollution is in focus and as a result we expect prices to stabilise in September/October before continuing to fall back less than $US100 per tonne in 2022,” UBS stated.

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