Iron ore prices have arguably outperformed in 2023, remaining at strong, profitable levels for producers despite concerns China’s return from Covid may not be all it’s cracked up to be.

The market was on a rampage earlier this week amid hopes China was finally committing to some long-sought stimulus measures, including support for developers in its downtrodden property market.

But those green shoots have been violently uprooted today.

Dalian futures fell 2.7%, while Singapore 62% Fe prices dropped a whopping 3.16% to US$106.25.

Fortescue (ASX:FMG) was the biggest casualty. A day after releasing its FY23 production results, revealing a new iron ore shipping record, it fell more than 5% and was the major contributor to a 1.19% decline for the materials sector.

It comes a day after Fortescue CEO Fiona Hick joined Rio (ASX:RIO) CEO Jakob Stausholm in issuing a ‘cautiously optimistic’ outlook on China’s economy, the key export market for both companies.

But if demand from the steel sector is to continue to grow some very different conditions to the rampant property sector growth that fuelled the mid-2000s boom may need to emerge.

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Steel demand now more reliant on infrastructure

Crude steel production recovered in June, falling 0.1% against a 5.1% YoY decline the previous month, with the EU, Japan and South Korea’s weakness countered by stronger Chinese, Indian and US output, Commbank analyst Vivek Dhar said in a note.

“China’s steel output rose in year‑on‑year terms in June for the first time since March. An improvement in steel mill margins in China on hopes of stimulus likely explains the result,” he said.

“Earlier this week, China’s top leaders refrained from announcing any major stimulus plan, but indicated an “adjustment” of restrictions for the property sector. China’s property sector accounts for 35‑40% of China’s steel demand and has continued to weaken through H1 2023.”

New construction in property is continuing to decline, leaving infrastructure developments to do the heavy lifting for steel demand.

“Given just how low homebuyer confidence remains in China, we think any stabilisation in China’s property sector will likely take place next year,” Dhar said.

“If China is looking to support steel demand and economic growth in H2 2023, we would need policy to focus on boosting infrastructure investment (20‑25% of steel demand).

“While China’s top leaders did call for a faster issuance of local government bonds, which are used primarily to fund infrastructure projects, they stopped short of increasing the quota. Policymakers are reluctant to increase local government special bonds because of concerns over local government debt.

“Overall, we continue to expect China’s steel demand and production to remain subdued through H2 2023.”

Dhar said the World Steel Association sees steel demand rising 1.3% in 2023 after a 6.2% slide in 2022, but the CBA mining doyen sees recession risks to that outlook, outside of India which has lifted production 7.4% in the first five months of this year.

Rio CFO Peter Cunningham told analysts this week it remained a wait and see proposition whether iron ore would be supported at prices of around US$110/t.

A big drop in prices compared to the first half of 2022 was among the main drivers behind a 43% fall in first half net profit to US$5.1 billion for the iron ore giant in the first half of 2023.

“I think when you look at it, steel demand in China has been pretty flat in the half year on year so far,” Cunningham said.

“But we’re still seeing extremely soft property market. I think it all depends how that flows through.

“You’re seeing I think management of of the economy, through the government pretty carefully and I think we’ll just have to see exactly how they pull various levers on stimulus into the second half to meet their objectives in terms of growth. We’ll just have to see how that plays out.”