Economic intelligence firm Fitch Solutions Country Risk and Industry Research raises its iron ore price forecast for 2022 from $90/t to $120/t and its forecast for 2023 from $75/t at $110/t, as Chinese demand started picking up again.

The company expects Chinese demand to also remain strong in 2022 and 2023 thanks to the government’s new stimulus for the infrastructure sector in the face of slowing economic growth.

Iron ore prices reversed course in December 2021, embarking on an uptrend after crashing in mid-2021. After starting a long-running rally since mid-2020, and the exceptional rally in the first half of 2021, prices fell sharply from July 2021.

However, the persistence of supply constraints and a strengthening of Chinese demand led to a price reversal from December 2021.

However, as prices hit $150/t in February this year, the Chinese government announced a crackdown on speculative iron ore trading, causing iron ore prices to fall in the face of negative investor sentiment, hovering around $120/t.

The National Development and Reform Commission (NDRC) has announced that investigative teams will be dispatched to the commodity exchange and major ports to examine iron ore stocks and trading in the spot and term. The Dalian Stock Exchange then doubled transaction fees for certain iron ore futures effective Feb. 16.

“While we expect iron ore prices to experience some weakness in the coming days relative to spot levels following the Chinese crackdown, we believe this will only be temporary. We believe prices will be supported by supply constraints and renewed strength in Chinese demand in 2022, such that the average annual iron ore price for 2022 and 2023 will remain above pre-Covid-19 levels,” said Fitch Solutions.

China boost
The company is more positive towards Chinese demand for iron ore following a number of developments. First, and most importantly, China appears to be planning to increase its financial support to the economy in 2022, amid weakening economic growth prospects due to a weak real estate sector and strict Covid-related containment measures. -19.

The Chinese government announced on January 25 that Beijing will set a reasonable annual quota for local government bonds to boost infrastructure investment in 2022, which will be very supportive of iron ore demand and prices.

Deputy Minister of Finance Xu Hongcai also announced that the central government would increase transfers to local governments, adding that the Ministry of Finance had issued advance quotas of 1.46 trillion yen for local government special purpose bonds in 2022.

“Second, we expect iron ore consumption from the steel sector to increase sharply in 2022 after power shortages in the second half of 2021 limited steel manufacturing activity,” Fitch Solutions said.

On the supply side, while production growth in Brazil and Australia has started to improve and supply easing in the maritime market, metals major Vale will still take a long time to come back. at capacity levels before the Brumadinho dam collapsed, according to the company.

“Continued low production from the world’s third-largest iron ore miner from 2018 to 2020 has set the stage for higher prices in 2020, especially as Chinese steel producers, who have a growing preference for high-grade ore from Brazil, increased their production and thus the demand for iron ore.

“As major miners focus on value rather than volume in 2022, announced production targets are still subject to multiple risks – for example, the Australian Bureau of Meteorology predicted average to above average numbers cyclones in 2022, increasing the risk of disruption to mining and transport operations in Western Australia – we expect global iron ore supply to remain constrained this year.”

Beyond 2022, Fitch Solutions expects iron ore prices to follow a multi-year downward trend. He maintains his view that iron ore prices will have a steady downward trend as slowing Chinese steel production growth and increased output from global producers will continue to loosen the market. .

Longer term, Fitch expects prices to fall from an average of $120/t in 2022 to $50/t by 2031. This price decline will be driven by a combination of weaker demand growth and increased supply which will loosen the market.

“Slower demand growth from China will be the primary driver of lower prices beyond 2022. We expect China’s fiscal spending growth to slow from 2023,” Fitch Solutions said.

The negative impact this will have on the demand for iron ore will be exacerbated by a simultaneous redirection of public spending from steel-intensive infrastructure projects to a combination of low-steel-intensive infrastructure and investment. in services. These include high-tech infrastructure such as fifth-generation telecommunications networks, large data centers, electric vehicle charging stations, the industrial Internet, modern transport such as urban metros and intercity high-speed trains, as well as very high voltage power transmission. projects.

“In line with this change, we expect an increased focus on green or decarbonized steel, which requires far less iron ore and is produced in electric arc furnaces, compared to the current blast furnace production model which requires high levels of iron ore and highly polluting coking coal.

“This structural shift in China’s economic growth trajectory will depress the growth rates of steel consumption and production. While domestic steel production has been allowed to significantly outpace steel demand in over the past decade, with the resulting surplus exported, we expect production growth to approximate with domestic consumption patterns in the coming years. China’s iron content peaks before the end of the decade,” says Fitch Solutions.

In addition, the company expects the current high levels of profitability of the world’s leading iron ore mining companies to help support strong production growth in the years to come. Global iron ore production growth is expected to accelerate in the coming years, ending the stagnation that has persisted since iron ore prices hit a 10-year average of $55/t in 2015.

“We expect global mining production to grow by an average of 2.4% from 2021 to 2025, compared to the contraction of 2% over the previous five years. This would increase annual production by 378 million tonnes in 2025 from 2020 levels, roughly equivalent to India. and Russia’s combined production in 2020.”

Additionally, the risks to the company’s price forecast are primarily on the downside. The Chinese government may engage in even tougher policies in the wake of Evergrande’s financial difficulties, which could further depress demand for iron ore and, therefore, prices.