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Iron Ore futures: Production cost swings and weak Chinese demand take shine off Fe prospects

By Mensholong Lepcha

Edited by Georgy Istigechev

13:05, 2 November 2022

A macro photo of red crushed iron ore.
Iron ore futures prices have slumped about 34% year-to-date – Photo: ChWeiss / Shutterstock.com

Iron ore futures prices extended their fall in October 2022 as weak Chinese demand and poor global economic growth outlook dragged the industrial metal to its lowest price levels in over two-and-a-half years.

What does the future hold for iron ore prices? Will the commodity supercycle narrative make a comeback? Let us find out below.

What are iron ore futures? 

Iron ore futures are an agreement to buy or sell the commodity at a future date at a predetermined price. Unlike options and spot contracts, futures contracts obligate their holders to buy or sell the underlying asset at the expiration date.

Futures contracts are used by large-scale commercial and industrial commodities producers and consumers to trade commodities with ease on exchanges such as the Commodity Exchange (COMEX) and London Metal Exchange (LME). Commodity futures contracts on these exchanges are standardised for quantity and quality to facilitate trading. 

According to the Commodity Futures Trading Commission (CFTC), most iron ore futures market participants are “hedgers” who trade futures to maximise the value of their assets and reduce the risk of loss from price changes.

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Iron ore futures price action

Iron ore prices have continued to fall in 2022 amid weakening demand outlook from top consumer China.

The benchmark 62% iron ore futures chart sourced from the COMEX showed prices have slumped about 34% year-to-date to trade below $80 per tonne, as of 1 November 2022.

It was just over a year ago that iron ore prices had surged to an all-time high of about $220 per tonne in July 2021 on the back of a commodity supercycle narrative.

Why is Chinese demand important for iron ore prices? China is the world’s biggest importer of iron ore, with a market share of 70% of global iron ore imports, according to 2021 data quoted by Statista.

It is also important to note that 95% of iron ore is used to manufacture steel, therefore steel demand is a critical factor for iron ore prices. 

Prolonged weakness in the Chinese property sector and China’s strict zero-Covid policy has combined with poor global economic growth outlook to push iron ore prices to their lowest since February 2020.

China’s steel-hungry property sector is undergoing a debt crisis, which has resulted in real estate company bankruptcies, stalled housing projects and rock-bottom consumer confidence in Asia’s largest economy.

ANZ Research reported in end-September 2022 that newly started residential projects fell by 50% year-on-year while property prices extended price falls.

Commodity strategists Brian Martin and Daniel Hynes of ANZ Research said in a note of 28 October 2022:

“Prices have now fallen more than 50% from their peak earlier this year. Weakness in the Chinese property market remains a headwind for steel and iron ore. Supply-side issues have also weighed on the market.”

Furthermore, the resurgence in Covid-19 and subsequent lockdowns in China is threatening to adversely affect manufacturing and construction.

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On 31 October 2022, China's official manufacturing and non-manufacturing Purchasing Managers' (PMI) indices recorded a contraction in activity in October.

“All in all, October looks to have been a weak month for the economy, and November looks as if it will be no better than October. Compounding this is the fact that Covid cases are climbing again, and it is possible that we will see further small-scale lockdowns in China,” said Iris Pang, Greater China chief economist at ING Group’s research arm THINK.

Iron ore futures forecasts: Bearish outlook

According to Australia, the world’s largest iron ore producing and exporting nation, the outlook for iron ore price today remains bearish.

The Australian government published its federal budget on 25 October 2022 wherein the government cut its long-term iron ore price assumptions from $91 per tonne to $55.

“Commodity prices are assumed to return to long-term fundamental price levels, causing a fall in the terms of trade in 2023–24. Elevated coal, iron ore, metals and other ore prices are assumed to unwind over 2 quarters, by the end of the March quarter of 2023, to levels consistent with long-term fundamentals,” read the budget.

The Australian government added:

“In light of the ongoing Russian invasion of Ukraine, there is substantial upside risk to the thermal coal and LNG price assumptions, while China’s weakening growth outlook presents a downside risk for commodity prices, particularly iron ore.”

Fitch Ratings held a  bearish view for steel prices. The ratings agency cut its 2022 and 2023 global average price forecasts for iron ore alloys, citing underperformance for demand due to contraction in China’s real estate sector and looming recessions in Europe.

Fitch Ratings added that commodity imports could be impacted on higher import costs due to a strengthening US dollar amid aggressive interest rate hikes from the US Federal Reserve (Fed).

The agency forecast iron ore prices to trend at an average of $100 per tonne in 2023, compared to the 2022 average of $156.

“Larger than expected contractions in industrial activity in Europe and mounting risks of a US recession driven by a rate-induced demand collapse on the housing market are similarly preventing any turn in sentiment and lift for prices despite comparatively limited increases in miner capex for supply this year,” Fitch Ratings said on 27 October 2022.

The bottom line 

Iron ore futures’ prices give insights into raw material costs on which investors can assess the outlook for companies in several sectors, including automobile, construction and manufacturing.

However, it is important to note that forecasts from experts and analysts can be wrong.

Remember to always conduct your own research before trading or investing. Your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size and investment goals. 

Past performance does not guarantee future returns. And never invest money that you cannot afford to lose. 

FAQs

Will the iron price go up or down?

The Australian government published its federal budget on 25 October 2022, wherein the government cut its long-term iron ore price assumptions from $91 per tonne to $55 per tonne.

Remember that analysts, algorithm-based forecasters and even governments can be wrong in their assessments of the market and their predictions. Always do your own research before trading or investing. And never invest more than you can afford to lose.

Is iron ore in demand?

Demand from China is critical for iron ore demand as the nation accounts over 70% of total global imports. As of October 2022, prolonged weakness in the Chinese property sector and strict zero-Covid policy in China has combined with poor global economic growth outlook to push iron ore prices to its lowest since February 2020.

Who is the biggest iron ore producer?

Australia is the world’s largest iron ore producing and exporting nation.

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