Iron ore has defied bearish expectations it would weaken at the start of this year, with restocking demand ahead of Lunar new year holiday and expectations for further Chinese stimulus driving prices higher.
Following a one-week hiatus due to the Chinese New Year, iron ore rose 1.9 per cent to $US149.40 a tonne on Monday for 62 per cent quality ore in the spot market, according to NAB, advancing 55 per cent in the past three months.
The stellar rally has drawn the attention of Chinese authorities, however, who have threatened to crack down on market speculation pushing prices higher.
Prices fell sharply last week ahead of the annual holiday after China’s National Development and Reform Commission (NDRC) released a statement saying speculation had been the main driver of the iron ore price rally through January.
The state economic planner also said it would examine measures to ensure the “smooth operation of iron ore prices”.
Chinese authorities issued similar statements in May when the price of iron ore was trading near $US200 a tonne. Following that intervention, prices briefly fell, but the market would eventually push iron ore close to $US240 a tonne within weeks.
The current period of stability suggests Chinese authorities will have to do more than signal their displeasure with speculators if they want to see lower prices, particularly if fundamentals remain intact.
“The pattern of Chinese jawboning in commodity markets is that it works for a month before prices recover and go higher,” said Ben Cleary, portfolio manager of the Tribeca Global Natural Resources fund.
“My expectation is that the influence of their jawboning will decline year by year.”
Back in mid-January, analysts argued iron ore’s days above $US100 a tonne were numbered because of China’s push to meet emissions targets, and temporary disruptions to supply in Brazil.
“From what I can see, inventories are slightly below seasonal average levels and demand looks strong,” said Mr Cleary.
“We’ve had three months of expanding PMI prints in China, increasing Chinese credit growth and that bodes well for the next quarter or two, so we certainly don’t see a collapse coming.”
Speculators may be active in the market but, they don’t represent the whole story.
“We think there’s some truth that speculation, particularly around this time of year, may be the primary driver of iron ore prices. However, there are other factors to consider,” Vivek Dhar, CBA’s mining and energy commodities analyst told clients last week.
“The most important in our view is steel mill margins, which have largely tracked between $US90 and $US120 per tonne of steel rebar of hot rolled coil produced this year. Steel mill profitability is a significant driver of iron ore prices and would need to be lower to meaningfully pressure iron ore prices lower.”
The market is also vulnerable to another supply shock, with rising COVID-19 cases in Western Australia mine sites and the potential for major weather events linked to La Niña.
“Its fairly clear the weather is on the change, and we haven’t had any major supply disruption from weather events for three or four years now,” said Mr Cleary.
“The other big X-factor is COVID. Half a dozen mine sites in WA are reporting omicron. You would think between those two, there’s a big potential for supply shock.”
China’s policy settings, if anything, should also provide support to iron ore prices.
In January, the People’s Bank of China cut the seven-day reverse repo rate and the one-year medium term lending facility rate by 10 basis points to 2.1 per cent and 2.85 per cent, respectively.
The rate cuts are likely to help drive growth in 2022, with infrastructure investment expected to rise and the property construction sector downturn likely to ease. Both sectors account for 30 per cent of Chinese steel demand.
