The outlook for iron ore prices

CBA Mining & Energy Economist Vivek Dhar discusses the conditions that contributed to the recent decline in iron ore prices and the factors shaping demand and supply in the months ahead.


14 Oct 2021



[MUSIC PLAYING] TOM PIOTROWSKI: Thanks for tuning in. My name is Tom Piotrowski, I'm a market analyst at CommSec. And today I am speaking to the CBA's mining and energy economist Vivek Dhar. And we're going to talk about some of the factors that are influencing iron ore prices presently. Viv, thanks very much for your time. It's great to talk to you.

VIVEK DHAR: Thanks Tom, I really appreciate it.

TOM PIOTROWSKI: Viv, when we look at iron ore prices, particularly over the course of recent history, there have been so many different factors influencing prices. But I suppose most acutely in recent times Chinese policy has had a very dramatic impact on prices.

VIVEK DHAR: That's right. So we've seen iron ore prices really be quite volatile in the last 12 months. We saw prices rise to record highs of $233 a tonne in mid-may. And since then we're currently tracking at about $120 a tonne but we've gone as low as $94 a tonne. So we've seen prices really capitulate and the real driver of that has been Chinese policy as you alluded to. In particular, what it is steel production.

In the first half of this year steel production lifted about 12% year on year. But we saw policy coming around mid-year where we saw in order to reduce emissions, policy makers are looking to cap steel output in 2020 one at 2020 levels. And so the implication there is quite significant because we need to see about a 12% year on year contraction in the second half in order for us to comply with those policy objectives.

And if we look at the data for July, we, saw China's steel output fall 8.4% year on year. In August it fell 13.2% year on year. So these this policy has traction. And because of the impact on steel output, that has really caused iron ore demand to fall and that's been the key reason why we've seen iron ore prices decline since May.

TOM PIOTROWSKI: So given what you've said under the Chinese policy response, then we seem to have found an equilibrium where iron ore prices are concerned around this $112 mark.

VIVEK DHAR: We've seen a lot of fluctuation particularly over the last week. It's very difficult to pick prices during the National Day holidays, that's from October 1 to October 7. We saw we see a lot of restocking activity and then we see that activity subside. So it's been difficult to get a landing point exactly where prices are.

But our forecast for the fourth quarter of this year is around $100 a tonne. And that's very much based around the idea that we should see more downward momentum, particularly given to reach compliance. At least in October we may see some pressure on steel output again.

TOM PIOTROWSKI: So obviously the Chinese policy response has got a lot to do with air quality. How long is the runway for this stream of thought Viv when it comes to Chinese policy makers thinking?

VIVEK DHAR: Sure. So this policy, you're just honest on the background of where this all came from. At the end of last year, the Ministry of Industry and Information Technology actually announced that they were looking to do some steel production controls for 2021. This was announced but really in the first 6 months of this year we really saw that have no real impact.

But by the middle of the year as we saw a greater push to control emissions reduction. And because we saw the post-pandemic recovery a lot of provinces really got into trouble with not meeting some of the emissions reduction goals. And so that's been the real trigger point for this policy and in terms of the how long or the duration of it.

Look, for this year it's going to be quite punitive because we're trying to cap steel output. But some level of steel production control is likely going to be an ongoing policy in coming years. We think for now this sector is a very significant sector when it comes to emissions, it accounts for about 15% of China's greenhouse emissions. So because it's such a significant aspect, it's going to be controlled.

And right now the best way to reduce emissions is to make sure that steel output is contained and that's simply where policy makers have really shifted their focus to for that. So at least for the remaining fourth quarter. But even when we talk about the first quarter of next year, particularly because we've got the Beijing Winter Olympics in February, we're likely to see a similar strict controls persist. But for the remainder of 2022 too there is a lot of uncertainty but I would say that some level of production control will still exist.

TOM PIOTROWSKI: So Viv, that's one side of the equation that's governing prices. What do you see is the other significant influences on iron ore prices at the moment?

VIVEK DHAR: Sure So the other part to consider when we talk about Chinese policy is that it's not all one way traffic. Like right now when we talk about what's happened with steel supply, it's quite significant. But steel demand has actually weakened as well as we've seen the Krebs cycle turn in China. What that means is your demand relating to the property sector, the infrastructure sector, manufacturing activity, this all naturally slows when we see the credit turn the corner.

But what is now happening is we're seeing the property sector go through more elevated pain. And that's linked to what's been happening with China Evergrande and a number of property developers which are really struggling in this environment to pay back some of their bonds. And this is something which is going to cause extended pain for construction, particularly in the real estate sector which accounts for about 30% of China's steel demand.

So this is going to be something that was already happening secretly, but we may see this extended and hurt steel demand even more. But to put into perspective, this pain that we've seen so far in terms of steel demand from construction it still hasn't changed the dynamic of the steel supply cuts.

We've actually steel rebar which is used in construction lift in prices since the middle of August. So if steel demand was really a worry and the most dominant driver, we'd expect steel prices to fall and iron ore prices to fall at the same time but we're not seeing that. We're seeing steel prices rise and iron ore prices fall which tell us that it's the steel supply story which is dominant right now.

TOM PIOTROWSKI: So is it reasonable to say that the subdued conditions when it comes to output are being met by slightly stronger conditions in terms of demand?

VIVEK DHAR: So I wouldn't say demand is strengthened throughout this year. I'd say it's now weakening. But the steel output cuts are just so much more severe. We've just seen steel output cut far more severely, and that's what's really driven the price action in steel and the lower demand for iron ore.

So that's really been the narrative is often we look at steel demand and we think that's going to be the dominant driver. You know that's been weak and it looks bad in terms of what's happening in the property sector but it's still not the key issue to keep in mind in terms of the foreseeable iron ore price.

TOM PIOTROWSKI: I suppose the other consideration at the moment is that we're seeing elevated prices when it comes to coal, which obviously includes metallurgical coal. How important is that contribution to what we're seeing as the broader dynamic for steel and iron ore?

VIVEK DHAR: Yeah. It's like the high coking coal price and coal prices, which go into steel mill inputs. It's certainly impacted margins, but it still hasn't affected the upward trend in steel mill margins because iron ore prices have fallen.

So the steel mills are very much in a good position because of the steel output cuts and the strength in steel prices. But what it has meant is your iron ore that you're buying the preference has changed. So we're seeing bigger penalties against lower grade iron ore. So that's a 58% FE grade which we do see from some Australian producers. And we're seeing that preference maintained for mid-grade which is 62% and high grade as well.

And the contaminants, so silica and alumina with silica in particular because higher silica means you use more coking coal, that's attracted more penalties against it as well. So we've seen the type of iron ore you buy from the mills change just to avoid coking coal usage.

Iron ore supply is another part of this, which is part of the downward pressure we're seeing on iron ore prices. The key to keep in mind is going to be Valley. And Valley additions this year they're going from about 330 million tonnes in the middle of the year as a production capacity to about 343 million tonnes by the end of this year. And next year they're looking to get to 317 million tonnes.

Now, given the market size is around 1700 million tonnes. The additional increase this year is going to be quite minimal where supply increases will have a bigger negative impact on prices will be in 2022. And that's something that is also in our forecast because we see prices falling to about $85 a tonne by the end of next year.

Well, Viv it's always a pleasure to talk to you. We could talk for a lot longer but we'll wrap it up there. Thank you so much for your time.

Thank you, Tom.

And Thanks very much for joining us for the Executive Series.

Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 ("CommSec") is a wholly owned, but non-guaranteed, subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 ("the Bank") and both entities are incorporated in Australia with limited liability.
This information is directed and available to and for the benefit of Australian residents only and is not a recommendation or forecast.

This information has been prepared without taking account of the objectives, needs, financial and taxation situation of any particular individual. For this reason, any individual should, before acting on the information on this site, consider the appropriateness of the information, having regards to their own objectives, needs, financial and taxation situation, and, if necessary, seek appropriate independent financial, foreign exchange and taxation advice. CommSec, and its related bodies corporate, do not accept any liability for any loss or damage arising out of the use of all or any part of this information. We believe that this information is correct as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. 



This site is directed and available to and for the benefit of Australian residents only. © Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 ("CommSec") is a wholly owned, but non guaranteed, subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and both entities are incorporated in Australia with limited liability.

By clicking on the "Download the CommSec App" buttons above, you will be directed to or These sites are not affiliated with CommSec and may offer a different Privacy Policy and level of security.