Material Matters: Iron Ore, Steel, Copper

Commodities | Mar 22 2023

A glance through the latest expert views and predictions about commodities: outlooks for iron ore, steel and copper.

-Some analysts are suggesting investors shouldsell into the iron ore rally
-A surprise price recovery in US steel doesnt look to last as demand outstrips real need
-Investments in new copper projects insufficient to avoid looming shortfall later this decade
-But could copper first build to a surplus in 2024?

By Danielle Austin

Rallying Iron Ore Prices Meet Analyst Resistance

Iron ore has ceased to be Citis preferred exposure to the China reopening trade, with the broker anticipating what it describes as a patchy recovery between sectors.

Citi considers the current price rally unsustainable, noting while it expects the commodity to continue to demand a tight price range of US$120-130 a tonne over coming weeks, it is more pessimistic on the remainder of the year and continues to predict a six to twelve month price of US$105 a tonne. In particular, the brokerexpects the absence of meaningful credit stimulus for the Chinese property sector could prove a headwind for steel demand in the country.

In a similar vein, Morgan Stanley does continue to see some near-term headroom for China steel production, and subsequently iron ore prices, but does not expect this strength to carry into the second half.

This broker expects a surplus market to emerge by the second half, driven by a likely levelling off in Chinas steel production, increased recovery in scrap metal use, and a seasonally stronger supply. While warmer weather is currently driving ongoing resumptions of construction activity, Morgan Stanley highlights the Chinese government aims to curb steel production after the peak construction season in April and May.

Considering these factors, Morgan Stanley thinks the price of iron ore might well surge to US$140 per tonne in the second quarter,but investors are advised to prepare for weaker pricing later in the year.

Strength In US Steel Prices Unlikely To Last

Macquarie warns the current jump in US hot rolled coil prices is unlikely to last, despite spot prices reaching US$1,142 a tonne this month. US HRC was fetching a price of just US$730 a tonne as recently as November, after declining more than -60% in the year last. Macquarie does acknowledge the current rally is driven primarily by a tight market.

Lead times for US hot rolled coil are currently closing in on 2021 peaks, reaching 8.7 weeks in mid-March from 4.7 weeks in January, though the broker postulates apparent demand is currently outperforming real end demand. Macquarieexpects these long lead times can sustain pricing near-term as supply-demand balances correct, but also that it takes only one or two months until the current rally runs out of steam.

Longer-term, the broker continues to see recessions to hit Europe and the US from the second and third quarters of 2023, respectively. Hence why the steel market, excluding China, will see a negative demand trend emergingthat will likely squeeze margins heading into 2024.

While upside risk is that demand could prove resilient, Macquariesees prices reaching US$1,300 a tonne in the second quarter, before declining to US$800 a tonne in the third quarter, and US$740 a tonne in the closing quarter of the running year.

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