Posted on 16 Nov 2021
Iron ore prices are expected to remain under pressure in 2022 after their rally ended and values collapsed to levels below previous forecasts, says Fitch Solutions. The research firm is consequently revising down its iron ore price forecast for 2022 to $90/tonne from $130/t.
Chinese demand for iron ore stemming from the country's V-shaped economic recovery and the government's major stimulus plan in supporting the construction industry peaked in the first half of 2021. This happened with the peak seasonal activity for the construction sector in May-June, and China's energy crunch that resulted in declining steel production – and therefore iron ore demand – starting in June.
“While China's energy crunch has started to ease and production curbs on steel are also being lifted gradually, we do not expect the strong demand impact that had stemmed from stimulus to return in 2022 as construction projects reach completion and the pipeline of new projects lessens, with the Chinese Government focusing on tightening credit lines,” Fitch Solutions says in a report seen by Kallanish. “Additionally, we see rising risks to the Chinese property market and thus iron ore demand from the construction sector, following Evergrande’s financial difficulties.”
If Evergrande’s difficulties spark contagion for other Chinese property developers, iron ore demand would be further hampered. Evergrande has also been trying to sell its existing inventory of properties at a discount in an attempt to raise funds to meet its obligations. This could result in lower property prices and restrict developers’ ability to buy metals used in construction.
Moreover, since a large part of local government revenue used for infrastructure spending comes from land sales, this situation could hamper steel demand in the coming years.
Lastly, “additional regulations on credit and local government spending are likely to come into effect following Evergrande’s fallout, dampening the outlook for construction and metals demand for the coming 3-5 years,” Fitch Solutions says.
On the supply side, improving production growth from Brazil and Australia has started to loosen tight iron ore supplies on the seaborne market, though Vale will take longer to return to pre-Brumadinho dam collapse capacity levels, the firm continues.
“We expect prices to remain pressured into 2022 as supply improves and demand growth slows. That being said, we do expect that most of the downward movement is now behind us, and prices should not collapse in 2022 from current levels as they did in 2021,” it concludes.
Source:Kallanish
