• Iron ore prices remain steady but ANZ commodity strategists say supply-side failures are propping up prices
  • ANZ and Westpac knock down year end forecasts
  • Coal miners lead resources stocks as ASX closes the week

Analysts at one of Australia’s big banks say iron ore prices remain on shaky ground despite China’s efforts to get its economy back on track, saying only supply side issues are supporting iron ore prices.

It is well known iron ore producers have struggled to hit guidance in recent year, BHP (ASX:BHP) and Fortescue (ASX:FMG) aside, though neither have been in any rush to expand.

Rio Tinto (ASX:RIO) and Vale have made a sport of missing guidance, with Vale’s failure to recover from the Brumadinho dam disaster in 2019 one of the main reasons behind last year’s record iron ore price run.

ANZ commodity strategist Daniel Hynes and Soni Kumari say they have lowered their iron ore price target to US$115/t for 2022, with prices expected to head lower in the fourth quarter and 2023 as stimulus measures wane, demand weakens and the market slips into a small surplus, swinging from a 44Mt deficit in 2021 and 18Mt deficit this year.

“Beijing has stepped up fiscal policies to support economic growth, but we see new downside risks. There is a long way to go before the property sector will see any meaningful rebound,” Hynes and Kumari said in a note to clients.

“Environmental constraints are also likely to reduce China’s crude steel output, so we have lowered our steel production assumptions and now expect a second consecutive year of contraction.

“This is being offset by ongoing supply constraints. Growth remains elusive for Australian exports as miners battle extreme weather and labour issues. Similar issues are plaguing Brazil. When combined with smaller falls in exports from India and Ukraine, the iron ore market remains tight.”


Property meltdown, environmental constraints to keep lid on demand

Hynes and Kumari say China will look to keep crude steel output in the second half of the year to 2.7Mt/day or lower to meet its aim of lowering production in 2022, just the third contraction in three decades.

That would be a big drop from the 3.04Mt/day rate in June. The property market and China’s now infamous zero-COVID policy are nowhere near a turnaround, ANZ thinks.

“The latest Politburo meeting, concluded on 28 July 2022, suggests policymakers are placing higher importance on the zero-COVID policy than on growth. Beijing appears willing to miss its growth target, vowing to strive for “the best outcome” and cement the economy’s recovery. Notably, it has also kept its zero-COVID policy,” they said.

“Beijing also handed more responsibility to local governments to stabilise the property market. They have been given policy flexibility to support genuine property demand.

“This includes further issuance of special local government bonds (SLGB).

“While this may lift property investment in coming months, there is a long way to go before the sector will see a meaningful rebound. Home sales in 30 big cities contracted 33% y/y in July amid the unexpected spread of mortgage boycotts.”

Westpac also updated its iron ore forecasts today, lowering year-end expectations for Australia’s biggest export commodity from US$115/t to US$105/t while jacking up its thermal coal year end forecast from US$325/t to US$350/t and lowering its met coal year end price from US$371/t to US$212/t after a major 53% correction since early June.

In the short term, iron ore prices have stabilised after dropping below US$100/t in mid-July, with Singapore 62% Fe futures trading down 1.72% at US$110.35/t this afternoon. Steel mill margins have improved in China, with analysts at the Shanghai Metals Market expecting iron ore prices to lift in the near future.

“The demand is growing slowly as steel mills resume the production, and the overseas shipments have declined. It is expected that iron ore prices are likely to rise in the short term.”


Coal miners lead rally

To local markets, where the ASX 200 Resources index dropped by 0.11% and coal miners led the gains in the mining sector.

Whitehaven (ASX:WHC) and New Hope Corp (ASX:NHC) continued to push recent highs, but its was Stanmore (ASX:SMR) that led the way, rising more than 10% after reporting a record half year profit of more than US$232m and paying JV partner Mitsui US$380m for the 20% of the Poitrel and South Walker Creek mines it doesn’t already own.

That’s an even better deal than it sounds given the price is set to be reduced by the “significant dividend” due to Mitsui which will be declared soon by the JV.

SMR finished the June quarter with US$546m in cash and net debt of US$258m, and will not have to dip any further into debt or equity markets to fund the deal despite paying BHP (ASX:BHP) over a billion dollars US in cash for its majority 80% stake in what is now known as Stanmore SMC in May.

For some reason De Grey (ASX:DEG) rose 3% while the rest of the gold stocks floundered. Hemi remains a great discovery.


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