Iron Ore Drops Below $80 as China’s COVID-19 Emergency Continues

• China’s Covid Zero policy has done a number on iron ore, which threatened US$75/t in futures markets today
• Iron ore has now fallen to its lowest level since the early days of the pandemic
• Materials ekes out a small gain as ASX 200 runs hot

 

The spiral for Australia’s largest export commodity has continued with Singapore iron ore futures falling to a touch above US$75/t intra-day.

They’re rebounding now, with the damage less severe at a 1.94% loss for US$77.85/t.

But it still augurs poorly for the overnight index prices, which are likely to show the commodity continuing below US$80/t.

It is a price not seen since the pandemic began a couple of years ago, though for all intents and purposes it is the fact the pandemic continues to rage where it originally started in China that has put so much pressure on the price.

An endless wave of lockdowns shows little since of subsiding, with adherence to Covid Zero and the philosophy of increasingly autocratic Chinese leader Xi Jinping the main takeaway from China’s recent National Congress in Beijing.

Capital Economics, regular monitors of Chinese and other economic data, think there is little hope of a shift until 2024.

That will keep property and steel demand under pressure and do little for the iron ore majors, all of whom are in the red today.

They all produce at cash costs of around US$20/t, meaning they are unlikely to change their production and development plans.

It will be more difficult for smaller, higher cost producers, many of whom were pushing tightly on their margins at last quarter’s pricing, which averaged US$103/t CFR China on the Platts 62% Fe index.

While there were certainly bears across the iron ore space, few thought the price would drop to these levels so soon. Westpac was still forecasting quarter average prices for December of US$100/t three weeks ago.

Its November update will likely be less rosy. It views long run prices at around US$85/t.

 

Bad for the budget

Iron ore prices, the key the WA Government’s astonishingly high surpluses in the past couple years, are now within sight of the US$66/dmt price used in its forecasts for FY24 onwards.

WA forecasts an average price of US$77.50/t for the 2023 financial year.

Each US$1/t shift up or down from that mark is worth around $81 million to WA taxpayers.

The Federal Budget is even more bearish, projecting a dip in iron ore prices to US$55/t by the end of the first quarter of CY23, with thermal coal prices also to normalise to a barely believable US$60/t.

CapEc’s particularly overcast take on China’s recovery from Covid Zero came amid official PMI numbers today that saw contractions last month across the manufacturing and service sectors.

Commbank sees upside if China ends Covid Zero earlier than that, with it only seeing a gradual fall to US$60-65/t by 2026/27 following a volatile year ahead.

“We broadly expect iron ore prices to bottom in Q1 2023 as China’s COVID-zero policy continues to weigh on demand,” CBA analysts said last week.

“A shift away from China’s COVID-zero by the end of March 2023 should see iron ore prices lift in the following quarters.”

Most commodity prices slid badly Friday, except for lead, which rose more than 7% amid expectations its inclusion in Bloomberg’s commodity price index would lead to more trading interest, ANZ’s Gregorius Steven said.

Steel prices have been falling, with Chinese rebar sliding 1.2% to US$537.06/t on Friday.

CuFe Ltd (ASX:CUF) executive director Mark Hancock, whose company operates the JWD iron ore mine in WA’s Mid-West is optimistic about the prospects of being to ramp up again once Chinese economic sentiment recovers.

“I have seen many times before how iron ore prices can rebound quickly once sentiment turns in China, this was most recently illustrated when prices hit the mid 80’s in November 2021 and were back in the mid 120’s by December 2021 and then the 160’s earlier this year so it’s a matter of being patient and staying ready,” he said.

“Stock levels of iron ore at Chinese steel mills are the lowest level for nearly a decade on a days of consumption basis so as sentiment improves significant restocking is likely to be required.”

 

And on the market?

Despite iron ore’s woes, the materials sector finished the day up 0.1%, with energy off 0.44% on a generally strong day for the ASX 200.

Pilbara Minerals (ASX:PLS) was again the people’s champ, up 4.52% to $5.09 a share, with other lithium stocks including Lake Resources (ASX:LKE) up big among the mid-tiers.

Nickel Industries (ASX:NIC) finished up 4.29% after announcing record production in its September report at its nickel pig iron RKEF lines in Indonesia, but IGO (ASX:IGO) and Coronado (ASX:CRN) both dipped after a strong start to trade.

 

 

Monstars share prices today:

 

 

 

At Stockhead, we tell it like it is. While CuFe is a Stockhead advertiser, it did not sponsor this article.

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