Iron ore is bouncing back to start 2022, with seaborne prices reaching three-month highs last week. But will the surge remain, or is it just a flash in the pan for the commodity giant?
According to Saxo Australian market strategist Jessica Amir, there is plenty to consider when making predictions on the iron ore market, and as you might expect, a lot of it has to do with what’s happening in China.
The price for 62 per cent Australian iron ore fines was trading as high as $US131.5 ($182) per dry metric tonne (dmt) at the port of Qingdao last Wednesday – much stronger returns than last November, when prices dropped below $US90 per dmt.
Amir believes there are two main contributors for the price rise. Firstly, according to government data, China has announced or begun 3 trillion yuan’s ($654.85 billion) worth of infrastructure projects to start 2022.
This is 1.8 trillion yuan more than the value of Chinese infrastructure projects announced from January 1-19, 2021.
Secondly, major miner Vale’s Brazilian iron ore operations have been hampered by heavy rains to start 2022. A region representing 40 per cent of Vale’s total iron ore output for the first nine months of 2021 was forced to halt proceedings.
With the upcoming Chinese New Year holidays and Winter Olympics impacting steel production into February, Amir expects the iron ore market to remain volatile until March, before picking up again.
Port inventories, the state of China’s property market and new iron ore players could also impact the market going forward.
“China’s port inventories of iron ore are high, apparently just 10 million tonnes shy of the all-time high of 157mt (million tonnes) in March 2018. Meaning China has a heck of a lot of idle iron ore, which is keeping the iron ore price from galloping ahead,” Amir said.
“China’s property sector is looking shaky and keeping gains in check. China’s biggest developers are in financial distress. Evergrande has recommenced work on over 60 major projects, but we still don’t know the fate of China’s property sector.”
To reduce its reliance on external sources, China is moving to commission more of its own iron ore mines, while there are some other new iron ore players on the horizon, including the Simandou iron ore deposit in West Africa. These developments are likely to also shift the iron ore dial going forward.
At the time of writing, the seaborne price for 62 per cent Australian iron ore fines had weakened slightly to $US126.85 per dmt at Qingdao.