World iron ore prices remained above $US120 a tonne this week (for 62% Fe fines) with Chinese buyers out of the market because of the Lunar New Year break.
Their return next week will test the realities of the China re-opening story and expectations that the country is somehow going to re-ignite demand for the mineral this year, but there’s been little discussion about the realities to the supply/demand outlook in 2023.
There seems to be an automatic assumption that supply will fall short of demand (which is supposed to rise) when there’s rising doubt that supply will be short this year – at the moment there’s an oversupply of iron ore in the Chinese and global markets.
Chinese iron ore imports topped 1.11 billion tonnes last year – down a fraction from 2021 while its crude steel output for 2022 was 1.01 billion tonnes, down 2.1% from last year, the second annual decline.
But there is every chance both imports and output will fall back under the billion-tonne level in 2023 because of a combination of weak demand and oversupply.
Demand from the construction sector is expected to remain weak because of the depressed property market.
While the central government has revealed measures to support cash-strapped property developers, they are focused on keeping quality developers afloat, rather than aggressively boosting demand.
There is a multi-million overhang of unsold units to be soaked up and a lot of unhappy buyers and investors to be assuaged (and made to accept losses).
Analysts said that while iron ore supplies to China were solid in November (with deals done for extra tonnes ahead of the Lunar New Year holidays which started last weekend), the expectation that the Chinese government would soon ease its strict coronavirus policy supported demand in December.
But the surge in Covid infections delayed the unloading of received shipments until this month.
In December, China imported 90.86 million tonnes of iron ore, down 8.1% from November but up 5.6% from December 2021.
The Chinese government normally doesn’t break out production and trade data separately for January and February because of the Lunar holiday disruption and the country’s National Statistics Bureau usually combines January and February data. Which means we won’t get a clear sign of iron ore demand and crude steel output until April and the data for the March quarter (and the month of March).
But separate monthly reports on manufacturing and service sector activity, as well as inflation, house prices and car sales will be issued in February (for January) and early March (for February).
But early forecasts suggest that demand for crude steel and iron ore could end up being lower in 2023 than in 2022, with weaker crude steel demand and smaller orders from the property sector.
Chinese steelmakers will be very happy facing an iron ore over supply situation this year because it should mean less volatile and lower average prices.
The oversupply will come from producers (in Australia and Brazil) looking to push extra tonnages at a time when the market will be flush with ore.
Total iron ore demand this year from imports and domestic production is estimated at 1.39 billion tonnes by the online group MySteel. That figure is 3.6 million tonnes down on 2022’s figure.
But China’s domestic iron ore production could increase by 17 million tonnes in 2023 compared to 2022 – to around 297 million tonnes, according to several Chinese based steel industry websites (such as MySteel).
Those extra tonnes will displace prospective imports.
With total availability of imports and local production around 1.41 billion tonnes, something is going to give and western analysts wonder how long can iron ore prices remain around $US110 to $US120 a tonne for the benchmark 62% Fe fines product.
Positive growth factors in China this year are the absence of disruptions, effective measures to contain the coronavirus, the resumption of mining operations in Northern China, and the government measures to boost spending and to support the better placed property companies.
But demand from steelmakers for iron ore in 2023 is forecast to fall by Chinese forecasters, given the central government’s plans to continuously reduce or keep its steel production unchanged compared to the previous year. The transition to electric arc furnaces will also affect iron ore consumption as the push to limit carbon emissions resumes.
MySteel reckons the upshot of the supply/demand situation is a surplus of around 23 million tonnes of ore this year, although that could be changed by weather events off the WA or Brazilian coasts.
MySteel pointed to extra tonnage from India and three of the world’s majors.
Brazil’s Vale in 2023 plans to increase production of iron ore by 5 million tonnes this year, compared to 2022 – up to 315 million tonnes; Rio Tinto – by 3 million tonnes, to 323 million tonnes, Fortescue Metals Group – also by 3 million tonnes, to 193 million tons. India will also gradually restore the import of raw materials to China – up to 3.5-5.5 million tonnes a month during the year.
Earlier this month, BHP CEO Mike Henry was upbeat on the prospects for iron ore and steel in China this year while Rio Tinto was more circumspect.
The oversupply forecasts from China of course should be seen as trying to influence the market but MySteel is a pretty reputable data website and its estimates have underlined the uncertainty of the China re-opening story when it comes to the demand for and supply of iron ore.
