Business intelligence firm Fitch Solutions Country Risk and Industry Research is revising its 2022 iron-ore price forecast upwards, from $90/t to $120/t, and its 2023 forecast, from $75/t to $110/t, as Chinese demand has once again started picking up.

The firm expects Chinese demand to also remain strong in 2022 and 2023 on the back of the government's renewed stimulus of the infrastructure sector in the face of slowing economic growth.

Iron-ore prices reversed course in December 2021, embarking on an uptrend after collapsing in mid-2021. After embarking on a longstanding surge since mid-2020, and the exceptional rally in the first half of 2021, prices dropped sharply starting in July 2021.

However, continued supply constraints and strengthening of Chinese demand led to prices reversing course from December 2021.

However, as prices reached $150/t in February this year, the Chinese government announced a crackdown on speculative trading of iron-ore, resulting in iron-ore prices heading lower over negative investor sentiment, hovering at about $120/t.

The National Development and Reform Commission (NDRC) announced that investigation teams would be sent to the commodity exchange and key ports to look into iron-ore inventories and trading in the spot and futures markets. The Dalian bourse then doubled transaction fees for some iron-ore futures contracts effective from February 16.

"While we expect iron-ore prices to see some weakness in the coming days from spot levels over the Chinese crackdown, we believe this will only be temporary. We believe that prices will receive support from supply constraints and renewed Chinese demand strength in 2022, such that the annual average iron-ore price for 2022 and 2023 will remain above pre-Covid-19 levels," Fitch Solutions says.

CHINA STIMULUS
The firm is more positive towards Chinese demand for iron-ore following a number of developments. First, and most importantly, China seems to be looking at increasing its financial support to the economy in 2022, amid weakening economic growth prospects driven by real estate sector weakness and strict Covid-19-related lockdowns.

The Chinese government announced on January 25 that Beijing will set a reasonable yearly quota for local government bonds to boost infrastructure investment in 2022, which will be very supportive for iron-ore demand and prices.

Vice Finance Minister Xu Hongcai also announced that the central government will boost transfers to local governments, adding that the Finance Ministry has issued ¥1.46-trillion in advance quotas for local government special purpose bonds in 2022.

"Second, we expect iron-ore consumption from the steel sector to pick up strongly in 2022 after power shortages in second half of 2021 limited steel manufacturing activity," Fitch Solutions highlights.

On the supply side, while production growth from Brazil and Australia has started to improve, and there is a loosening of tight supplies on the seaborne market, metals major Vale will still take a long time to return to pre-Brumadinho dam collapse capacity levels, the firm says.

"Persistently weak production from the world’s third-largest iron-ore miner over 2018 to 2020 set the stage for the 2020 price rally, particularly as Chinese steel producers, who have a growing preference for Brazil's high-grade ore, ramped up production and, thus, demand for iron-ore.

"As major miners are focusing on value over volume in 2022, with announced production targets still being subject to multiple risks – for instance, the Australian Bureau of Meteorology has predicted an average to above-average number of cyclones in 2022, raising the risks of disruptions to mining and transport operations in Western Australia – we expect global iron-ore supply to remain constrained this year."

LONG-TERM PRICES
Beyond 2022, Fitch Solutions expects iron-ore prices to follow a multi-year downtrend. It maintains its view that iron-ore prices will consistently trend downwards, as cooling Chinese steel production growth and higher output from global producers will continue to loosen the market.

In the longer term, Fitch forecasts prices to decline from an average $120/t in 2022 to $50/t by 2031. This price decline will be driven by a combination of weaker demand growth and increased supply loosening the market.

"Slowing Chinese demand growth will be the main driver of lower prices beyond 2022. We anticipate a reining in of China's fiscal spending growth from 2023 onwards," Fitch Solutions says.

The negative impact that this will have on iron-ore demand will be exacerbated by a concurrent shift in government spending away from steel-intensive infrastructure projects and towards a combination of less-steel-intensive infrastructure and services investment. These include high-technology infrastructure such as fifth-generation telecommunications networks, big data centres, electric vehicle charging stations, industrial Internet, modern transportation such as urban subways and inter-city high speed rail, as well as ultra-high-voltage power transmission projects.

"Consistent with this shift, we expect an increased focus on green, or decarbonised, steel, which requires much less iron-ore and is produced at electric arc furnaces, compared with the current blast furnace production model that requires high levels of iron-ore and coking coal, which is highly polluting.

"This structural shift in China’s economic growth trajectory will depress steel consumption and production growth rates. While domestic steel production was allowed to significantly outstrip steel demand over the past decade, with the resulting surplus exported, we expect production growth to be brought closer in line with domestic consumption patterns in the coming years. We expect China’s annual iron-ore consumption to peak before the end of the decade," Fitch Solutions states.

Further, the firm expects current high levels of profitability among major global iron-ore miners will help underpin strong production growth in the coming years. Global iron-ore production growth is projected to accelerate in the coming years, bringing an end to the stagnation that has persisted since iron-ore prices hit a decade-low average of $55/t in 2015.

"We forecast global mine output growth to average 2.4% over 2021 to 2025, compared with the 2% contraction over the previous five years. This would lift annual production by 378-million tonnes in 2025 compared with 2020 levels, roughly the equivalent of India and Russia's combined 2020 output."

Additionally, risks to the company's price forecast lie mainly to the downside. The Chinese government could engage in even more stringent policies following Evergrande's financial difficulties that could further drive iron-ore demand and, thus prices, down.