Monsters of Rock: The picture for Chinese steel demand isn't getting any better for iron ore giants

Iron ore has cooled off after a hot start to 2023
ANZ has knocked down its short term forecast to US$95/t amid weakness in China’s property and steel sector
Lithium and battery metals the best performers today among the large cap miners

Iron ore was a shock boom commodity early this year, streaking past US$130/t without a care in the world as traders looked to China’s reopening with a sense of wide-eyed optimism.

The waters look very much muddier now, with China’s property market continuing to look challenged.

And that ripping start to the year for iron ore and Chinese steel production could well turn out to be a small curse.

While we saw a surge in prices earlier this year, the 261Mt produced in China in the first three months of 2023 was beyond the annualised level of just over 1Bt of crude steel expected to be produced this year.

That means steel production will be curbed, with many mill owners in negative territory at the same time as iron ore supply potentially ramps up.

Big bank ANZ has knocked down its three month iron ore price target to US$95/t, having raised its short term target to US$130/t in March.

“Muted steel demand from China’s property markets during the peak construction season is a key headwind for iron ore and coking coal demand,” commodity strategists Daniel Hynes and Soni Kumari said.

“Narrowing profit margins could see loss-making steel plants curtail operations, which would slow steel production growth in Q2 2023.

“Further, the increased amount of steel produced using the Electric Arc Furnace process (which mainly used scrap steel as its key feedstock) is reducing demand for iron ore.

“We see prices finding a floor near US$95/t.”

Chinese property hardly safe as houses

One of the big overhangs on bulk commodities since late 2021 has been China’s awful and debt-ridden property sector.

The engine room for China’s mid-2000s growth train and the key factor in the last mining boom, Chinese home-builders, are still struggling to see a turnaround.

While new home prices and property sales are up, property investment is lagging, with floor space sold dropping 22% on the year last month after rises in January and February and a small drop in March, Commbank mining expert Vivek Dhar said.

“Property investment also remains weak, with the pace of contraction accelerating from ‑7.2%/yr in March to ‑16.2%/yr in April,” he said in a note.

“Subdued property investment, despite policymakers easing credit access for property developers, highlights the challenges facing policymakers to instil confidence back into the property sector.

“The most relevant indicator for China’s commodity demand is newly constructed floor space – especially for steel consumption. Newly constructed floor space has declined ~21%/yr in the first four months of 2023 and follows a ~39% fall in 2022.

“It’s worth noting that China’s newly constructed floor space also declined through 2020 (‑1%/yr) and 2021 (‑11%/yr), indicating the prolonged weakness in commodity demand from China’s property sector.”

Hynes and Kumari say monthly steel production in China may need to drop to 70-75Mt — a 20%yoY drop — to prevent a build-up in inventories after a strong start to 2023.

“New housing construction is the key driver behind strong steel demand,” they said.

“Without any improvement on the horizon, steel mills are likely to start reducing output in coming months. We also don’t expect infrastructure investment to offset this weakness.

“We expect steel production in China to fall in coming months due to a the lack of growth in new construction activity. This will weigh on iron ore demand, just as supply disruptions ease.”

That could push the iron ore market into a small surplus after two years of deficits powered by supply underperformance, Hynes and Kumari say.

And on the markets

With that in mind and with the Singapore futures price for 62% Fe iron ore down 1.99% to US$104.70/t, it’s not surprising the three Pilbara giants finished — just barely mind you — in the red.

The materials sector fell 0.24% to disappoint as the ASX 200 lifted 0.59%.

Among the advancers only battery metals stocks really exceeded among the resources majors, with lithium producer Allkem (ASX:AKE) up 1.96%.

Pilbara Minerals (ASX:PLS), IGO (ASX:IGO) and Core Lithium (ASX:CXO) all booked gains in excess of 1%, while Mali lithium developer Leo Lithium (ASX:LLL) gained more than 8%.

Graphite miner Syrah Resources (ASX:SYR) was also up as it fronted shareholders at its AGM today.

Chairman Jim Askew said while graphite markets had been tough in 2023 so far, with the company choosing to “moderate” production at its Balama mine in Mozambique, the battery metal and its long term future as a downstream supplier of anode material for EV batteries was more positive.

“The Company is navigating a challenging 2023 year to date with volatile natural graphite demand and reduced sales from our China anode customer base caused by slower growth momentum in EV sales in the early part of this year and higher supply chain inventory positions,” he told shareholders.

“Production will be moderated from Balama until demand and price conditions warrant increased production levels, and natural graphite sales will continue to be made from our inventory positions.

“We are maintaining readiness to quickly increase operational activity and production should end-market conditions require it. Despite near-term demand volatility, the future prospects for our upstream business remains strong, underpinned by EV growth, our cornerstone supply position in the global natural graphite market and the quality of the Balama asset.

“There is enormous opportunity in our downstream business as evidenced by the extraordinary battery manufacturing capacity buildout in North America, and strong market and government support for Syrah’s AAM capacity expansion – providing an increasingly positive market position for Syrah as an ex-China AAM supplier.”

The Tesla supplier is building an 11,250t AAM plant in Louisiana, and is studying a potential expansion to 50,000tpa.