• Iron ore prices have run 38% since the end of October to almost US$110/t, but Commbank has questioned whether the run is sustainable
  • Mining expert Vivek Dhar says Chinese infrastructure stimulus may not be large enough to support upside to US$120/t
  • Steel production lifts in late November, helping miners salvage an otherwise dim day on the ASX

The Commonwealth Bank says there remain questions over the sustainability of a 38% run in iron ore prices since the start of November, which has propped up the ASX materials sector over the past month.

The rise in iron ore prices back towards US$110/t from a lowly <US$80/t at the end of October has provided solace to a market afflicted by global economic pressures and interest rate hikes.

It has come off the back of both fiscal support for China’s property sector and the surprising pace of an unwinding of its increasingly unpopular Covid Zero strategy, with experts now predicting a quicker return to normality in the Middle Kingdom.

But Commbank mining guru Vivek Dhar says steel demand is unlikely to lift much from China’s debt-riddled property industry, fingering infrastructure as the main source of steel demand growth.

At the same time, he says stimulus packages will likely be less generous than they were in early 2021, when a China emerging from its first set of Covid lockdowns sent steel and iron ore prices surging to record highs of US$237/t.

“CISA (industry body the China Iron and Steel Association) estimate that the infrastructure construction sector accounted for ~23% of China’s steel demand last year,” he said.

“All in all, China’s steel demand growth will likely be modest in the 0‑2% range. Such a view brings into question the sustainability of the recent rally in iron ore prices.

“While we see upside risks to our iron ore price forecast over the next year (peak of $US100/t by Q3 2023), we think prices above $US120/t are unlikely to be justified by China’s steel demand impulse next year.”

Real estate investment in China fell 7.3% this year to October 31, Dhar noted, saying Covid Zero has dulled the impact of previous efforts to revive property development.

Iron ore lifts on small signs of positivity

Steel mill utilisation has been relatively low through the second half of 2022 in China with most steelmakers losing money.

But stats from CISA show steel production rose 1.32% over the last 10 days of November, with inventories at large and medium sized enterprises falling 11.54% on November 20 levels to 15.3039Mt.

The Singapore 62% Fe contract is up 0.55% to US$108.80/t this morning, while the Dalian price rose sharply before reverting flat around 12.30pm AEDT.

While the rest of the market hobbled to a 0.94% drop, iron ore and other miners have kept the ASX from recording an 11-sector wipeout, with materials up 0.1%.

Fortescue Metals Group (ASX:FMG) gained 1.06% which South32 (ASX:S32) was up 1.28%.

Yancoal (ASX:YAL) rose 1.77% with Coronado (ASX:CRN), Alumina (ASX:AWC) and 29Metals (ASX:29M) among the top mid-caps.

BHP (ASX:BHP) and Rio Tinto (ASX:RIO) were narrowly in the green at 12.45pm AEDT.

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