Ground Breakers: Iron ore is poised for a strong finish to 2023

Fitch’s BMI predicts iron ore will average US$110/t in 2023 and US$100/t in 2024 as market continues to stay strong despite rising supply

China’s infrastructure, auto and manufacturing sectors are driving strong steel demand as its property market falters

Lithium stocks continue to receive cold shoulder from investors after tough month

For so long it’s been a battery metals investor’s market in 2023.

But heat has been seeping out of lithium prices, taking equities focused on energy transition metals back down with them.

Pilbara Minerals (ASX:PLS) for instance is now worth around $11.5 billion, having lost 17% of its value in the past month.

Fellow travellers are little better off. Allkem (ASX:AKE) is down 23% over the last 30 days while IGO (ASX:IGO), which has also been exposed to falling nickel and copper prices, is down more than 25%.

Down 16% over the past month Mineral Resources (ASX:MIN) rounds out a tough ride for the sector’s largest players.

Bearish analyst reports haven’t helped.

READ: JPMorgan says lithium will crash >40pc but UBS thinks these quality ASX stocks can ride out the storm

By contrast run down and written off iron ore has made a run for the hills of late.

Prices in Singapore for 62% Fe material — the benchmark grade aligned to the fines shipped from the Pilbara by Rio Tinto (ASX:RIO) and BHP (ASX:BHP) recently ran above US$120/t and currently trade above US$114/t.

BHP and Rio are still down over the past month, but nowhere near as starkly as their lithium producing peers, while pure play iron ore miner Fortescue (ASX:FMG) is up almost 3%.

Can iron ore continue to beat the odds?

There remains skepticism in some quarters that iron ore can remain so strong.

China’s property market continues to resemble a popped balloon, with little gas in the tank to reinflate it quick enough before new holes are poked in its membrane.

But Fitch analysts say the market is poised to remain solid through the end of 2023, with prices to average US$110/t this year and remain above US$100/t in 2024 before beginning what they view as a long decline to US$50/t by 2032.

“Prices have retained their resilience on the back of strong Mainland Chinese imports in 2023 thus far, a result of declining domestic physical inventories at ports,” they say.

“During January to August of 2023, Mainland Chinese imports of iron ore surged by 7.4% y-o-y to a record high of 775.7mnt. Total iron ore inventory at Mainland Chinese ports as of September 15 2023 is 11.4kt, compared to 13.4kt on January 6 2023.

“Despite Mainland China’s uneven economic growth and a still failing property sector, blast furnace steel production and thus iron ore demand have shown a defiance of all odds, through support from non-property sectors including shipping, machinery, autos and infrastructure.

“From January to August 2023, China produced 712.93mnt of crude steel, up 2.6% from the same period in 2022. We expect some more upside to iron ore prices in Q4 2023 ahead of the winter holidays as steel mills continue restocking.”

Positive sentiment in futures is also keeping iron ore strong in Singapore and on China’s Dalian exchange. Fitch is hopeful Chinese stimulus could refire the property sector.

“Despite the Mainland Chinese property sector still being in contraction, positive sentiment is stemming from hopes of a turnaround, with some form of stimulus from the Mainland Chinese government,” analysts say.

“Total credit growth in China climbed 9% y-o-y in August 2023, versus 8.9% in July 2023, to mark the first month-on-month acceleration since March 2023.

“Commercial bank lending was up 11.1% in August compared with the same period a year ago. Indeed, bank loans surged in August to CNY1.36trn, nearly quadrupling from July 2023’s CNY345.9bn. These indicate that China’s beleaguered property sector may be starting to turn around.”

And on the markets

The materials sector has reflected those recent themes today, with iron ore stocks up, taking the sector to a 0.71% morning gain.

In the red are the big lithium players, with coal stocks also struggling.

Mid-cappers Core Lithium (ASX:CXO) and Azure Minerals (ASX:AZS) were amongst the hardest hit, both falling more than 5%, while gold stocks rebounded after a weak US jobs report which saw treasury yields fall from multi-year highs, ANZ’s Mahjabeen Zaman said.