Weekly Reports | Sep 22 2023
Iron ore prices surprise but challenges lay ahead; wage growth leading to a resilient mortgage market; migration to surge in the next two years; multi-earning, AI and the gig-economy.
-Iron ore price to face longer-term challenges
-Wage growth supporting mortgages
-Migration set to surge
-Multi-earning thanks to AI
Longer Term Challenges for Iron Ore
Iron ore prices have surprised Citi by moving up to US$124/t (spot), dragging iron ore equities higher. Chinese overproduction of steel persists, for now.
But longer-term trends remain, the broker suggests, being lower Chinese steel production with electric arc furnaces to take share from blast furnaces, rising demand for scrap, and higher demand for high-grade iron ore.
Citi recently declared market assessments of both long-term iron ore prices and costs need to rise. The broker doubts long-term margins for the majors are changed in any material fashion, higher near-term iron ore prices will have a modest valuation impact while raising near term earnings for the iron ore plays.
The broker currently forecasts second half 2023 benchmark iron ore at US$95/t (average), with 2024 at US$100/t. Citi is Buy-rated on Rio Tinto ((RIO)) and Champion Iron ((CIA)), Neutral on BHP Group ((BHP)) and Sell-rated on Fortescue Metals ((FMG)).
The Resilient Mortgage Market
When the RBA began hiking rates to combat surging inflation, it was widely assumed Australian house prices would fall -10%, -15% or even -20%. A step-jump in mortgage rates, exacerbated by the “mortgage cliff”, combined with a cost-of-living hit to household budgets, would force big-time selling with buyers thin on the ground.
It was also assumed that beyond the initial scramble for workers post-lockdowns, the unemployment rate would begin rising as the economy slowed.
That hasn’t happened either.