China's steel demand is set to slow. That could dent iron ore prices by nearly 30%
- Iron ore prices could decline as much as 28% by the end of 2023 on the back of a dip in Chinese steel demand and output, experts forecast.
- Morgan Stanley analysts say iron ore prices will fall and cited subdued production from the world's leading steel producer China, as well as the country's turn toward steel scrap.
- Analysts say there's still upside potential for iron ore prices in the coming months, as China reopens and eases Covid-19 restriction. But they do not expect the strength of China's steel production or demand to last beyond the second half of this year.
Iron ore prices could fall as much as 28% by the end of 2023 as China's steel demand and output are set to fall, experts forecast.
Morgan Stanley analysts say iron ore prices will fall and cited subdued production from the world's leading steel producer China, as well as the country's turn toward steel scrap.
"Our 2H23 base case forecast is $90 per ton," a report commodities strategist Marius van Straaten and a team said in a March 20 report.
That's about 28% lower than the current $126 per ton for benchmark 62%-grade iron ore.
Iron ore is primarily used to make steel, an important material in construction and engineering projects — and both Asian nations are on track to consume more.
Commonwealth Bank of Australia also predicted a drop in iron ore prices, expecting it to be $100 per ton by the fourth quarter this year "as China's steel demand eases in the second half of the year," the bank's analysts said last week.
Analysts say there's still upside potential for iron ore prices in the coming months, as China reopens and eases Covid-19 restriction. But they do not expect the strength of China's steel production or demand to last beyond the second half of this year.
Demand to slow
China's pent-up steel demand is likely to taper off in the second half of the year, CBA projects, citing China's conservative economic and policy agenda for 2023 at its key policy meetings in March.
China, which accounts for 70% of the world's iron ore imports, projected a growth target of around 5% for 2023.
Plans to centralize iron ore purchases in China under state-run entity China Mineral Resources Group (CMRG) could also contribute to lower prices in the long haul. The CMRG is set up to purchase raw materials for China's steel industry.
"If the CMRG can exert China's market power on iron ore producers, it should mean lower prices than otherwise over the longer-term," CBA pointed out.
Fitch Solutions expects China's domestic steel demand to slow in the coming decade compared to the last as the "rebalancing of the economy away from heavy industry and towards the service sector resumes" following the downturn of the property market.
"Stronger demand growth in India, the U.S., and Emerging Markets generally is unlikely to offset the net effect of a China slowdown," the finance and insurance company said in March 23 report.
Steel scrap stimulation
Demand for iron ore demand is also being challenged by China's ambitions to increase the consumption of steel scrap, an alternative material used in steel production.
In early March, China's Ministry of Industry and Information Technology announced that the country is increasing its steel scrap usage to 265 million tons this year, marking an increased share of 25% compared to last year's 19%.
Morgan Stanley estimates that for every 1% increase in scrap use, China's iron ore consumption is cut back by around 17 tonnes per year.
Steel production falls
Global crude steel output in February fell 1% year-on-year, after contracting in January as well.
The declines were driven by falling output among the world's major steel producers.
According to data from the World Steel Association, top producers like Japan, the U.S. and Russia saw production cuts of 5.3%, 5.3% and 8.6% respectively.
While the reading is not as steep as the 3.3% drop in January, Fitch expects limited production growth to persist throughout the year as major steelmaking firms continue to grapple with high input costs.
China, the world's leading steel producer, is reportedly looking to curtail steel production in 2023 for the third year in a row, according to Bloomberg.