Red hot iron ore prices may cool in the second half of 2021 as Chinese construction demand softens and Brazilian mine production accelerates – but neither is a safe bet, says Wood Mackenzie head of iron ore research Rohan Kendall.

Kendall reckons the “balance of risk” leans towards more demand and less supply, which is good news for our iron ore miners.

“On the demand side, Chinese construction and manufacturing hold the key,” he says.

“Tighter credit availability should take some of the heat out of the property market, but manufacturing activity remains red hot as recent demand-led power shortages in Guangdong and Yunnan provinces demonstrate.”

On the supply side it’s all about Brazil, as the country’s iron ore industry strives to regain its position in key markets after two dreadful years.

“Progress is slow going for Vale on its ‘pathway to 400 million tonnes per year’ with supply of high-grade fines and pellets still running well below target,” Kendall says.

WoodMac has raised its Q3 price forecast to $US185/t CFR versus an estimated $US200/t in Q2.

“We still think Q2 was the high point for Fe grade premiums (and discounts), and we expect both to contract slightly in Q3 – smaller premiums and smaller discounts – as mills adjust to much lower margins than were achieved in Q2,” Kendall says.

 

UBS: Is China pressing the brakes on steel production?

Press reports also suggest China is imposing more restrictive measures on steel production in in the second half to ensure output is lower year-on-year (y/y) and to meet carbon emissions goals, UBS says.

“China crude steel production in Jan-May has increased 13.9% y/y, or 58Mt to 473Mt according to the official data,” UBS says.

“If the government order is enforced, steel output in 2H21 would fall >10% y/y (assuming Jun is +5% y/y as implied by the CISA 10-day data).”

But UBS reckons this policy would be at odds with the government’s aim to deflate steel prices.

On the demand side, Brazil’s Vale is set to lift shipments ~11% y/y in 2Q21, ASX:BHP and ASX:FMG are broadly flat y/y, while ASX:RIO is down ~12%.

BHP, FMG, RIO share price charts

 

In total, iron ore shipments of the majors are set to lift ~65Mt half-on-half in 2H, UBS says.

“We are cautious on iron ore prices medium-term as supply is lifting and demand set to moderate,” UBS says.

“Spot FCF [free cash flow] remains strong (RIO, BHP, Vale, FMG 15-25% yield) and returns should be attractive in 2021.”

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