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By Fitri Wulandari
Edited by Jekaterina Drozdovica
Updated
After rebounding in the first half of 2022, prices for iron ore, which is used to make steel, have lost ground as demand from China was hampered by a slumping real estate sector and slowing steel output growth due to emissions curbs.
China, the world’s largest importer of iron ore, has continued to cut interest rates, including mortgage rates, to support growth, which has been hampered by lockdowns to prevent new outbreaks of Covid-19. So far, however, it does not seem to be working.
National real estate development investment dropped by 6.4% to RMB 7.95trn ($1.13trn) in the period from January to July 2022, while residential investment was down by 5.8% to RMB 6.02trn, according to data from the country’s National Statistics Bureau in August.
Reuters calculations on 16 September showed that new home prices in China resumed their month-on-month decline in August, down 0.3%.
On the other hand, supply constraints – partly caused by the ongoing war between Russia and Ukraine, as well as production issues in other major iron ore-producing countries, including Australia and Brazil – have supported iron prices so far this year.
As of 16 September 2022, iron ore on the Singapore Exchange has declined almost 23% in the past one year, while iron ore on the Chicago Mercantile Exchange has declined more than 10% year-to-date.
Can iron ore prices rebound? Here we take a look at recent iron ore price movements, the supply and demand conditions that shape the prices, and the latest iron ore price forecast for 2022 and beyond.
Just like other commodities, iron ore was not spared the impact of Russia’s invasion of Ukraine. The ongoing war has hampered iron ore shipments from the country.
According to ANZ Research on 2 June, Ukraine was the world’s fourth-largest exporter of iron ore, second-largest exporter of pig iron or crude iron and third-largest exporter of semi-finished steel.
The country has the capacity to produce around 75 million tonnes (mt) of iron ore each year, with a large proportion feeding its domestic steel mills. It exported 44mt in 2021, of which 45% went to Europe.
According to data from Australia’s industry ministry, Russia and Ukraine exported a combined 70mt of iron ore in 2021, equivalent to around one month of Australia’s exports. They shipped the iron ore mostly to China, the European Union and Asia.
Supply from India is also facing constraints after the Indian government raised the export tax on iron ore and concentrates to 50% from 30% to fight inflation. The government also imposed a 45% export tax on iron pellets, the New Indian Express reported on 21 May. The taxes were effective the following day.
Supply constraints from India and Ukraine emerged as exports from top iron ore producers Australia and Brazil grew slowly.
In a June report, Australia cut its forecast for the country’s iron ore exports for 2022 to 894mt, down from March’s forecast of 919mt, according to Australia’s industry ministry. The revised forecast represented a 2.5% increase year-over-year.
The lower export forecast for 2022 was because Australian major producers still faced persistent supply and labor shortages, which were compounded by the Covid-19 border restrictions that were in place until March this year, the ministry said in the Resources and Energy Quarterly June 2022 report.
“This is in addition to the outbreak of record rainfall in the Pilbara in May, and a negative Indian Ocean Dipole that could see further disruptions to production and exports in the June and September quarters,” the ministry said.
The ministry expected Australia’s iron ore exports to rise 2.3% to 915mt in 2023 and to increase by 3.6% to 948mt in 2024. In 2021, the Australia shipped 872mt of iron ore, a 0.6% increase from 2020.
ANZ Research forecast on 11 August that the market would see a deficit of 18mt in 2022, down from 44mt last year.
On 12 September, Fitch Solutions estimated that global iron ore production would increase by 2.1% to 3,147.7mt in 2022, up from 3,082.3mt in 2021. Output was expected to increase 3.1% to 3,246.4mt in 2023, and to 3,310.5mt in 2024.
Australia’s industry ministry said further weakness in China’s residential property sector, with declining new housing starts and sales, might offset the boost from China’s new infrastructure investment and easier credit conditions.
In January, the Chinese government announced it will front-load infrastructure investment and push forward the 102 mega projects earmarked for the 14th Five-Year Plan period, which runs from 2021 to 2025. The mega projects include roads, railways, public transit systems, airports, nuclear power plants, power transmission lines and pipelines.
In August, China lowered the over-five-year LPR (loan prime rate), on which many lenders base their mortgage rates, by 15 basis points to 4.3%, in a bid to boost house sales and investment, the state-run Xinhua News Agency reported.
According to ANZ Research in June, the property sector accounts for roughly 40% of China’s steel and iron ore demand. Construction accounts for more than half of steel demand globally.
“Both fiscal and monetary policy instruments are ostensibly providing support for demand and prices in 2022 and have failed to avoid the property market entering a large downwards correction or boost consumer spending,” Fitch Solutions wrote in 12 September’s note.
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According to Fitch Solutions, the slowing growth of Chinese demand will be the primary driver of lower prices beyond 2022. China’s fiscal spending growth is expected to slow down beginning in 2023, as the economy normalises and Covid-related disruptions fade.
The price of iron ore (62% Fe) hit a record high of $219.77/tonne in July 2022. Producers struggled to increase their output to meet a rebound in demand as economies started to reopen amid easing Covid-19 restrictions.
However, prices gave up their gains in the second half of the year after China announced that it had curbed steel production to combat air pollution and reduce emissions ahead of the Beijing Winter Olympics in February this year. 
The country’s steel production was further constrained following power shortages which led to blackouts. A debt crisis faced by Chinese real estate firms, which began with problems for Evergrande, heightened concerns over demand from the country’s property sector and put further pressure on iron ore prices.
By November, iron ore on the CME was trading at the $99/tonne level, with the lowest price of $92 hit on 18 November 2021. On the Singapore Exchange, iron ore hit its lowest price for the year at $82.82/tonne on 18 November.
Prices started to climb above $100 in December. They ended the year at $120/tonne for iron ore futures on the CME and $116/tonne on the Singapore Exchange. In 2021, iron ore on the CME lost 27.81% compared to a 70% gain in 2020.
On the production side, China’s steel output dropped 3% to 1,032.8mt in 2021 year-over-year, according to data from the World Steel Association.
The prices continued their advance going into 2022 after China announced its plan to boost infrastructure spending.
As of 16 September 2022, iron ore on the Singapore Exchange has dropped 22.71% to $98.10/tonne in one year. Iron ore on the Chicago Mercantile Exchange has declined 10.7% year-to-date, to $100.39/tonne as of the close on 15 September.
In its iron ore price forecast 2022, ANZ Research lowered its end year target to $115/tonne, down from its previous forecast of $130/tonne. It expected the iron ore price to trend lower in the fourth quarter and into 2023 as the impact of the stimulus measures peters out and iron ore demand weakens.
The firm forecast iron ore to average $126/tonne for the full year 2022.
Fitch Solutions lowered its iron ore price forecast 2022 to an average of $115/tonne, down from its previous forecast of $130/tonne. The downward revision was due to demand weakness, and came as a tight energy market, which is expected to continue into 2023, ended the higher price environment seen in the first half of 2022.
Australia’s industry ministry forecast iron ore (62% FE) to trade at average $115/tonne in 2022.
In the longer term, iron prices are forecast to decline, according to Australia’s industry ministry. It predicted benchmark iron ore prices to average $85/tonne in 2023 and continue to drop by 16% to $70/tonne in 2024.
ANZ Research forecast iron ore prices to trend lower, to an average of $105/tonne in 2023 and $95 in 2024
In its iron ore price forecast 2025, Fitch Solutions suggested the price could drop to $80/tonne. Its iron ore price forecast for 2030 was even more bearish, predicting the price to keep falling to $50/tonne by 2031.
“We maintain our view that iron ore prices will consistently trend downwards, as cooling Chinese steel production growth and higher output from global producers will continue to loosen the market,” the firm said.
Fitch Solutions forecast global iron ore mine output growth to average 2.8% over the years 2022-2026, compared to the average 0.9% contraction over the previous five years. The growth would raise annual production by 367.1 million tonnes in 2026 compared to 2022 levels, slightly more than India, Russia and South Africa’s combined output in 2022.
“We expect that current high levels of profitability among major global iron ore miners will help underpin strong production growth in the coming years. Global iron ore production growth will accelerate in the coming years, bringing an end to the stagnation that has persisted since iron ore prices hit a decade-low average of $55/tonne in 2015,” Fitch Solutions wrote.
Note that iron ore price predictions can be wrong, and that forecasts shouldn’t be used as a substitute for your own research. Always conduct your own diligence and remember that your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size and goals.
Keep in mind that past performance doesn’t guarantee future returns, and never invest or trade money you cannot afford to lose.
Iron ore prices have been volatile in the past two years. Prices rebounded in the first half of 2022, on tight supply and an upbeat outlook on China’s steel demand, but have since begun to fall.
Whether iron ore is a good investment for you depends on your portfolio makeup, investment goals, and risk profile. Always conduct your own research, and never invest any money that you can’t afford to lose.
As of 14 June, Fitch Solutions, ANZ Research, and Australia’s industry ministry suggested that iron ore prices may trend downward in the longer term.
However, do note that analysts’ iron ore price forecasts can be wrong. Always conduct your own research, and only invest what you can afford to lose.
Whether you should invest in iron ore depends on your risk tolerance, investing goals and portfolio composition. You should always conduct your own research, and never invest any money that you cannot afford to lose.
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