Long-term pain ahead for iron ore as prices fall amid supply-side pressure

Iron ore prices may have found a bottom, but more pain lies ahead as next year's surplus may last until 2028, driven by concerning demand in China and returning Ukraine production showing resilience despite the war, analysts say.

The IODEX CFR China 62% iron ore price hit a 21-month low of $91.90 per dry metric ton on Aug. 16, according to data from S&P Global Commodity Insights. Prices are expected to average $104/dmt in the second half of 2024 and $110.84/dmt for the year, according to an Aug. 15 note.

"The Platts-assessed IODEX fell to $99.30/dmt on Aug. 8 and remained below the $100/dmt mark for more than a week, suggesting the market has found a new bottom," Commodity Insights senior metals analyst Tamara Thorne said in an email interview.

China's steel exports are increasingly challenged by the imposition of new tariffs from the US, Mexico and the EU. Meanwhile, the reopening of the Black Sea corridor has seen Ukraine iron ore shipments exceeding expectations, jumping 115% year over year in the first seven months of 2024, Thorne said.

However, Ukraine's second-half 2024 iron ore exports could fall by 2.7 million metric tons, or almost 15%, compared with the first half, as the average price of electricity in the country rose 50% year over year in June — 70% higher than in the EU, according to a July 4 report from Ukrainian steel consultancy GMK Center.

In the long term, Commodity Insights expects the global seaborne balance to move into a growing surplus, which will weigh on prices to bring them down to an average of $80/dmt by 2028.

This surplus will be led by the start of Rio Tinto Group's Simandou project in Guinea. The project's high-grade ores will serve as a blending material to lift the overall grade of lower-quality blends from Australia, which will find markets in Europe and India, Thorne said.

At the same time, at the $80/dmt CFR China mark, Commodity Insights expects a significant reduction in low-grade, high-cost domestic supply, which will boost iron ore imports. Rapidly growing demand in India and Southeast Asia should also limit the downward pressure from mounting supply, Thorne said.

Steel industry under pressure

Chinese steel prices hit a seven-year low earlier this month, with producers facing huge losses. China Baowu Steel Group Co. Ltd. warned Aug. 13 that the situation is more severe than in 2008 and 2015 as the industry is undergoing a longer and tougher "winter" than expected.

"The growing losses at steel mills have led to more frequent maintenance and production cuts. Many mills have reduced their use of lump, opting instead for more lower-grade products or a higher ratio of iron ore fines to control costs," an international trader told Commodity Insights.

The pressure comes as China surpassed 1 billion metric tons of steel production for the fifth year in a row in 2023, and "demand from the construction industry remains closely tied to the outlook of the country's housing sector," BHP Group Ltd. said in a July 18 analysis.

The steel demand from China's construction industry was estimated to drop from 42% of total steel demand in 2010 to 24% in 2023, which BHP said could be partly attributed to "the ongoing shift in the Chinese real estate market, which led to a slowdown in residential building starts."

"The property sector, a major driver of steel demand, continues to struggle, contributing to a bearish market sentiment," S&P Global Commodities at Sea analysts said in an Aug. 21 note. "New home sales and vehicle production have also seen significant declines, further weakening the outlook for steel demand. While some anticipate a slight rebound in prices due to seasonal factors, any increase is unlikely to significantly enhance profitability for mills."

Vivek Dhar, director of mining and energy commodities research at Commonwealth Bank of Australia, said "the problem for China's property sector is that new construction starts have been falling in annual terms since 2020, highlighting the challenges to stabilize a sector facing structural decline," according to an Aug. 19 note.

On the plus side, China's machinery sector has seen "incredible growth," BHP said, rising from an estimated 20% share of overall Chinese steel demand in 2010 to 30% by 2023, boosted by an influx of equipment renewals. Infrastructure saw an estimated growth of 13% to 17% over this period, BHP said.