Iron Ore Prices Expected To Cool Despite Demand Into The New Year

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Iron Ore Prices Expected To Cool Despite Demand Into The New Year

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  • China expected to cool iron ore imports based on domestic decarbonisation agenda
  • Iron ore price per tonne at US $110 in November 2021
  • Markets in Singapore and Shanghai see iron ore prices between US $111 to US $126 at close of first week of 2022

Record iron ore price levels in 2021 have easily led investors to anticipate prevailing tailwinds for 2022. Such expectations are driven primarily by existing trade dynamics between Australian, and China — with iron ore intrinsically tied to the former’s currency, and the latter’s overall economic progress. However, a cooling of construction and steelmaking output within China isn’t the only reason for investors to consider lower averages for iron ore prices for the year ahead.

Despite being the leading importer of iron ore globally, China’s recent policies have seen it prioritising decarbonisation in time for the Beijing Winter Olympics next month. While this, along with Evergrande financial woes have resulted in softened steelmaking output and demand for iron ore imports, it is still a long shot to expect a rise in demand once the Olympic event concludes.

Regardless of these domestic curbs imposed near the start of 2021, iron ore imports to China surged past the 100 metric tonne mark in November — the highest it has been in over a year. As expected, this propelled iron ore prices to US $110 per tonne at the end of last year. This price action, however, is but another reason added to the compounded belief that iron ore prices will continue to chart lower towards the end of 2022.

Apart from reasons to do with domestic policy and demand in China, lowered price expectations for iron ore are also due to the high prices it achieved during the past year. Considering the attractiveness of its US $237 per tonne price in May 2021, other iron ore-producers will likewise see incentives to ramp up their own production. Being the world’s second largest producer of iron ore after Australia, Brazil is also expected to boost its iron ore supply, in contribution to an overall increase to global production — amid downward pressures on price per metric tonne.

Curbed Demand Influencing Exclusivity, Despite Lower Average Price Expectations

Investment bankers UBS Group have charted expectations for iron ore average prices of US $85 a tonne throughout 2022. Likewise, the ING Group anticipates a dip to US $95 a tonne to occur later in 2022, but only after iron ore averages maintain solid support at US $110 during 1Q22.

Apart from China’s present stance on decarbonisation, a broader sentiment championing climate change has also motivated iron ore producers like Fortescue Metals Group Limited (ASX:FMG) to reinvent its business within the scope of green hydrogen production. Through its subsidiary, Fortescue Future Industries, the company is set to establish itself as the largest supplier of green hydrogen to the United Kingdom.

Regardless of the assortment of trends presenting as headwinds moving against iron ore prices in 2022, markets in Shanghai and Singapore both saw solid gains to iron ore prices after the New Year holidays. Trading activity on the Dalian Commodity Exchange saw a weekly close at US $111.56 a tonne, while prices on the Singapore Exchange reached US $126.85. The rise in demand for the raw material was seen by analyst to correlate to the limited available production leading up to the Olympic event in February.

Louis Mosmann

Louis Mosmann is a Private Wealth Client and Research Assistant at KOSEC- Kodari Securities. Louis covers macroeconomic events, global markets and ASX300 company announcements, allowing clients to make more informed investment decisions. Email Louis at l.mosmann@kosec.com.au.

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