Iron ore, a barometer for the Chinese economy and driver of the Australian dollar, is probably having its wildest year ever. Prices jumped to a record above $US230 a tonne in May, crashed to about $US85/t in November on a government pledge to reduce steel output, and have now rallied 50 per cent in just six weeks.
The volatility is set to persist into 2022 as a rebound in steel production this month falters early next year, with the usual seasonal output constraints tightening in the run-up to the Winter Olympics in February.
Beyond that, strong headwinds are building — China is pushing ahead with cutting carbon emissions, steel output is expected to contract for a second year, while a debt-laden property sector is weighing on steel consumption and broader growth.
“Iron ore demand will broadly, gradually decline,” said CITIC Futures analyst Zeng Ning.
“The property industry is rather weak, steel consumption is likely to contract and more mills will use scrap to reduce emissions,” he said.
The brokerage expects China’s steel output to fall by 50 million tonnes in 2022.
The country buys about 70 per cent of the world’s seaborne iron ore and is set to produce 1.03 billion tonnes of steel this year, more than half of global supply.
In terms of what this all means for prices, UBS Group expects iron ore to average $US85/t in 2022, while Citigroup sees $US96/t. Capital Economics, meanwhile, predicts $US70/t by the end of next year. Futures in Singapore have averaged $US157/t so far in 2021, and traded around $128/t on Tuesday.
Among bright spots are potential fiscal stimulus in China, possible further easing in monetary policy, and more support for the property industry, while steel output could rebound when limits are removed after the Winter Olympics.
The view at Macquarie Group is that iron ore could spike in the first half of next year because current steel production levels in China look “unsustainably low”. Output in November slumped to the smallest for the month since 2017.