Iron ore prices climbed throughout the second half of last year and began 2024 at the highest level for 18 months. In the weeks since, however, prices for SGX iron ore futures have declined by over 10%, with the February 2024 contract having fallen from $142.57/t on January 3rd to $125.78 yesterday. Following such strong performance in late 2023, it is worth analysing the key reasons behind the recent weakness in iron ore prices.
China’s Economic Stagnation Continues
A critical factor in this price adjustment is the continuing economic stagnation in China. The country recently reported a figure of 5.2% year-on-year growth in Q4 2023 which, though sounding positive, fell short of analyst expectations. More telling is China’s Consumer Price Index (CPI), which indicated deflation throughout the last quarter of 2023, culminating in a -0.3% inflation rate in December. Adding to these indicators, China's official Purchasing Managers' Index (PMI) revealed a contraction in industrial manufacturing for the third consecutive month in December. However, the Caixin/S&P Global PMI offered a slightly more positive figure of 50.8.
These economic indicators have exerted pressure on the Chinese Yuan, which has depreciated by around 1% against the US Dollar since the turn of the year. This depreciation influenced China's central bank's recent decision to maintain the nation's medium-term interest rate, defying market expectations of a cut.
Downward Turn Defies Last Year’s Record Imports into China
The prevailing narrative surrounding China and commodity prices over the past year has been the weakness of the country’s debt-laden property sector in the post-pandemic era. The sector was previously a dominant driver behind the country’s economic growth and a major source of demand for industrial commodities. Despite China's economic challenges, the country's iron ore imports in 2023 rose 6.6% from the previous year, reaching a record 1.18 billion tonnes. This increase was surprising, given the downturn in China’s property sector, and yet this demand has not been enough to sustain high iron ore prices into this year.
A key factor behind the softening prices is China's record steel production and exports in 2023. With Europe's heavy industry still reeling from the gas price crisis of 2021-2022, China filled the gap by exporting significant steel quantities at lower costs. As noted by the Telegraph, Chinese steel exports last year were equivalent to the combined output of the UK, Germany, France, Italy, and Spain. Evans-Pritchard also notes the European Central Bank has reported that Chinese export prices “have fallen 6pc over the last year in yuan, 12pc in dollars, and 18pc in euros.” The increased volumes and decreased cost of exports from China, while propping up the domestic economy in the absence of its property sector, will impact the long-term prospects of industrial production elsewhere in the world. Indeed, news broke on Thursday 18th January that both blast furnaces at Port Talbot steelworks will be closed by parent company Tata Steel.
The domestic front also shows a shift. China's automotive industry, particularly electric vehicle (EV) production, reached record levels in 2023. This surge in EV production created an alternative domestic demand source for steel and therefore iron ore, somewhat offsetting the diminished demand from the construction industry.
Despite the recent price drop, it's important to contextualise the current iron ore price level. While more than 40% lower than the 2021 peak, it still stands higher than the five-year average between 2015 and 2020. This indicates that, while prices have receded from their recent highs, they are still relatively strong compared to historical standards. Indeed, ChAI’s forecast for SGX iron ore prices suggests that the market will continue to soften over the course of the next 6 months.