Big Banks Clash over $US100 Iron Ore Outlook

SEATTLE (Scrap Monster): Westpac’s veteran commodity strategist Robert Rennie has for months been warning that iron ore will plunge below $US100 a tonne later this year. So when ANZ declared prices will remain above that key psychological level for the rest of 2025, it raised some eyebrows.

The contrasting forecasts from two of Australia’s largest banks reflect the division across iron ore markets as traders brush off the ongoing carnage in China’s property sector, a major consumer of steel. Futures traded on the Dalian Exchange have rallied more than 20 per cent since June, while similar gains on the Singapore Exchange have kept prices supported above $US100 a tonne.

 ANZ attributed the resilience of the key steelmaking ingredient to Beijing’s crackdown on overcapacity across a range of industries, including steel. The subsequent pullback in production of the metal has improved profitability at mills across China as margins pushed into positive territory last month.

“This has provided some breathing space for steel-making raw material prices to push higher,” said ANZ’s senior commodity strategist Daniel Hynes. “Beijing’s renewed focus on overcapacity could see this rally sustained.”

Chinese steel prices were whacked during the second quarter as weak demand from the construction industry intensified the glut in markets. But a decline in blast furnace output in May and June eased the oversupply, sparking a rally in finished steel products, including Shanghai rebar and hot-rolled coil futures.

That has improved sentiment at steel mills, with nearly 60 per cent making a profit in June compared with just 15 per cent in the same period last year, according to a survey of 247 mills by Wood Mackenzie.

And ANZ expects steel prices and margins will continue to be supported by production cuts across China.

Mills in northern China have reportedly been ordered to curb output to ensure clear skies for a military parade on September 3. The crackdown mirrors Beijing’s blue sky policy in 2016, which was enacted to reduce record levels of air pollution.

While ANZ believes that will keep iron ore at $US105 a tonne over the next three months (given profitable mills are more likely to buy more of the raw material), Westpac is adamant that prices will inevitably fall below $US100 a tonne by the end of this year.

Westpac’s Rennie highlighted that China’s steel output data released on Friday was again well below his expectations. Indeed, production dropped below 80 million tonnes last month – the weakest performance for the month of July since 2017.

It means steel output over the first seven months has fallen 3.1 per cent from last year to its weakest level since 2020. Still, China’s imports remain elevated as Beijing capitalises on prices which are far lower than in previous years.

“China is clearly continuing to build significant strategic reserves in iron ore, and that’s the difference between prices holding above $US100 and melting away below $US90,” Rennie said.

Westpac also believes rising inventories of steel products and extreme weather conditions will continue to dampen construction activity and demand for iron ore.

Commodity strategists at Commonwealth Bank sit somewhere between ANZ’s comparably bullish view and Westpac’s scepticism and are tipping prices will fall to $US95 a tonne by the end of this year.

While CBA’s commodities specialist Vivek Dhar acknowledged that Beijing’s crackdown on the glut in steel had stabilised sentiment, he believes that will be offset by the hit to iron ore demand.

“It is this logic that underpins our view that the recent rally in iron ore prices is unsustainable,” Dhar said.

CBA forecasts China’s steel output to contract 2 per cent this year despite falling 3 per cent in the first half. Dhar noted that steel production would need to contract around 7 per cent this year for iron ore to sustainably trade at $US90 a tonne.

“Given the steepest fall in China’s steel production in any calendar year was 3 per cent in 2021, we think a 7 per cent fall this year is unlikely,” he said.

Courtesy: www.afr.com