There has seldom been a year like it.
Iron ore, a barometer of the Chinese economy and driver of the Australian dollar, is probably having its wildest year ever. Prices jumped to a record over $ 230 per ton in May, plunged to about $ 85 in November on a government pledge to cut steel production, and have now risen 50 percent in just six weeks.
Volatility is expected to continue through 2022 as the recovery in steel production falters this month early next year and the usual seasonal production restrictions tighten in the lead up to the Winter Olympics in February. In addition, strong headwinds are building: China is pushing ahead with reducing CO2 emissions, steel production is expected to shrink in the second year, while a debt-ridden real estate sector weighs on steel consumption and broader growth.
“Demand for iron ore will, by and large, decline gradually,” said Zeng Ning, analyst with CITIC Futures Co. “The real estate economy is on the weak side, steel consumption is likely to decrease, and more plants will use scr – to reduce emissions.” The brokerage expects China’s steel production to decrease by 50 million tons in 2022.
The country buys around 70 percent of the world’s iron ore deposits and will produce 1.03 billion tons of steel this year, more than half of the world’s supply.
What all this means for prices, the UBS Group expects iron ore to average USD 85 per ton in 2022, while Citigroup is forecasting USD 96. C -ital Economics is forecasting $ 70 by the end of next year. Sing -ore futures averaged $ 157 so far in 2021 and traded $ 126 lower on Wednesday.
The bright spots include potential fiscal stimulus in China, possible further monetary easing and more support for the real estate industry, while steel production could rebound if restrictions are lifted after the Winter Olympics. The Macquarie Group Ltd. expects iron ore to rise sharply in the first half of next year as current steel production in China -pears “unsustainably low”. Production slumped to its lowest level for the month since 2017 in November.
Nevertheless, there are “a lot of uncertainties,” said Tomas Gutierrez, an analyst at Kallanish Commodities, who expects a price trend below 100 US dollars for next year. The global growth outlook is mixed, while energy prices and supply shortages could add inflationary pressures. The omicron variant of the coronavirus now detected in the country is also a “dangerous variable in view of China’s zero tolerance -proach to Covid,” he said from Shanghai.
For the big mining companies, lower prices mean “reduced – but still pretty big – margins,” Gutierrez said. Smaller miners may need to consolidate, and projects resumed when iron ore prices are high will likely need to close, adding to a number of closed projects this year. Mining costs can be as low as $ 15 for a ton of iron ore, compared to prices well over $ 100 today.
Still, the stocks of some major mining companies have lost their luster this year. The Rio Tinto Group and the Fortescue Metals Group are heading for annual losses of more than 10 percent in Sydney trade, which in the case of Rio represents the first decline since 2015. The BHP Group is also currently in negative territory for the year.
Australian miners could face higher costs and lower product prices over the next year, UBS analysts, including Lachlan Shaw, said in a statement. The bank has a sell rating on Rio and Fortescue Metals and a neutral rating on BHP.
Global iron ore deliveries in 2022 will remain more or less stable from this year onwards, according to the bulk material tracker DBX Commodities. Australia doesn’t have much spare c -acity while Brazil may see volumes spike as Vale tries to ramp up operations and India sees exports decline.