Monsters of Rock: As China moves to kill speculation, some folks think the iron bull run can continue

Citi upgrades short-term iron ore forecasts on China property rebound hopes
But, China’s NDRC cautions against speculation (wink,wink), halting runaway prices
Commbank says Chinese steel consumption hopes may be ‘overly-optimistic’

It’s been the counter-intuitive rally to outfox all of the critics this year, with tight supplies and optimism around China’s expected economic stimulus and infrastructure investment sending iron ore prices to super high levels.

At over US$130/t, the world’s most traded commodity is trading at over six times the cash costs of the world’s largest iron ore producers, portending some staggering profits in next February’s half-year results.

Now, another investment bank is emerging to say the bull rally could run even harder, with Citi upgrading its short-term iron ore forecast to US$140/t. They haven’t been that high in well over a year.

A big factor is the fact China’s iron ore stockpiles are around 7-year lows, with hopes that the depressed property market which has underpinned concerns for the future of Australia’s largest commodity trade — almost 900Mtpa — could begin its turnaround in 2024.

Citi placed a year-end target on iron ore of US$130/t just three weeks ago.

It grinds sharply against the warnings of economists have the big banks, most of whom had year-end price targets of around US$100/t on the Pilbara’s red dirt.

“Overly-optimistic”: Commbank

Commbank’s Vivek Dhar said today Australia’s largest bank viewed iron ore markets as overly optimistic about Chinese steel consumption in the coming months.

That’s despite low stocks and weak supply that other analysts say has eradicated what was previously anticipated to be a large second half deficit.

The trigger for the most recent run this week appeared to be reports that China was drafting a whitelist of 50 property developers who would be eligible for support from financial institutions.

Dhar noted that hadn’t stopped other whitelisted property firms from defaulting in the past, such as Country Garden.

“A new ‘whitelist’ looks to be another temporary measure that may provide a short reprieve for China’s property sector,” he said.

“However, we think it’s a stretch to think that it will be the policy to stabilise China’s property construction activity (35‑40% of China’s steel demand).

“We continue to believe that property developers are still quite some time away from having the confidence to boost new construction activity given current credit conditions.

“We believe iron ore prices of $US100‑110/t (62% Fe, CFR China) better reflect the fundamentals in China’s steel market than prices above $US130/t. We think iron ore markets are overly‑optimistic on steel consumption in coming months.”

Iron ore miners like recent AGM holders Fortescue (ASX:FMG) and Mineral Resources (ASX:MIN) have grown more bullish on China’s near and long term iron ore demand, despite other producers such as Rio Tinto (ASX:RIO) noting its steel output may have already peaked.

Many of those miners are also placing hopes on India, which has dramatically ramped up its steel consumption this year, could join with other emerging economies in South East Asia to fill in falling demand from China, which also wants to feed more of its crude steel output from cleaner and greener scrap sources.

Iron ore futures fell 2.32% today to US$131.55/t, as China’s National Development and Reform Commission took moves to curb speculation in the market.

#China‘s #IronOre futures drop after Chinese regulators held meeting with iron ore trade firms and futures companies, warned against excessive speculation, market manipulation, etc. https://t.co/haGgRmRP6L pic.twitter.com/hSvg2mYov5

— YUAN TALKS (@YuanTalks) November 23, 2023

That’s code for we don’t like the look of these prices.

It comes with steel prices still well below 2021 highs that stirred the last major iron ore boom, with high iron ore prices pushing more mills into loss-making territory. At over US$300/t, met coal prices are also eye-watering for steelmakers.

Chinese steelmakers still expect strong prices next year, with the chief analyst of Nanjing Iron and Steel telling a conference in China last week he expected iron ore to average US$115/t in 2024.

Fortescue reverted from levels near record highs, down 2.12% today to $24.90, while Rio fell 1.28% and BHP (ASX:BHP) was down 1.72%.

That sunk the materials sector, down 1.56% shortly before the market close.