In 2022, many commodities have endured a year of highs and lows in their pricing, and Iron Ore is no exception. Prices on the Singapore Exchange (SGX) for Iron Ore peaked at $161.84 in early April of this year, following a similar trajectory to many other industrial metals that experienced bullish runs after Russia’s invasion of Ukraine. While this Iron Ore did not scale the same heights as witnessed in 2021, when it peaked at $219.77 in July, it was nonetheless a period of strong growth for prices.
Since that time, however, there has been a significant decline, with prices dropping below the $100 mark on the SGX in early September for the first time this year. Iron Ore Futures on SGX closed at $98.10 on September 21st, and may continue to oscillate between the $90 and $100 marks in the short term. Beyond that, ChAI’s 12 month price forecast indicates a strong probability of Iron Ore prices regaining their strength and climbing back into three figures, and this potential recovery will be heavily influenced by China.
SGX Iron Ore prices in 2022, including ChAI’s 12 month forecast at 50% confidence
China’s Construction Challenge
China’s influence on the global Iron Ore market cannot be underestimated, with the nation constituting over 70% of total world imports of the mineral. The overwhelming majority of this iron ore is processed into steel, with China also being the world’s largest producer of the metal. Much of the demand for that steel, and therefore iron ore, is driven by China’s property sector which constitutes around 33% of the country’s total steel consumption. While this is, of course, a significantly simplified portrayal of the market dynamic, there is a notable influence on iron ore prices from China’s property market.
Due to the outlined relationship between property development in China and iron ore prices, the turmoil of the former has had lasting impacts on the latter. China’s property sector has been in crisis due to many major development companies falling into unsustainable levels of debt and being unable to complete projects. The problem began with the development companies falling into debt with their financiers, and was then further compounded earlier this year when buyers stopped paying their mortgages for as-yet unfinished properties, further emptying the accounts of the developers. The situation has spiralled in such a way that almost all parties invested in the property market have lost.
Signs of Recovery?
Due to the crucial nature of the property sector to the overall Chinese economy - contributing as much as 29% to total GDP according to estimates in a 2020 study by the American National Bureau of Economic Research - encouraging the stalling industry to restart is of paramount importance for the Chinese government. As a result, a massive stimulus package was announced in late August to achieve that very aim.
The State Council has granted $44 billion to be used by state-controlled banks to encourage economic growth through spending on infrastructure development. The massive injection of capital comes alongside similarly large packages granted to local governments and state-backed electricity companies, all of which is designed to kickstart the wider Chinese economy.
Already, there are indeed some early signs of the stimulus package having a positive impact on economic growth in China. Steel output rose in August following two consecutive months of decline, according to S&P Global, and is expected to rise again further in September and October when the nation usually experiences strong seasonal demand for the metal. Furthermore, stocks of steel rebar have been declining; this has been noted by ChAI’s models and is currently a strong bullish driver for ChAI’s price forecasts SHFE Rebar Futures on 6 and 12 months, as shown in the image below. Certainly then, there is some evidence that the property sector is once again stirring.
Declining SHFE Rebar Stocks driving upwards price movement on 6 and 12 month horizons
Zero-Covid, Zero Certainty
While there may be positive signs for China’s property sector recovering, and subsequently boosting prices for iron ore and many other industrial metals, uncertainty about the longevity of any growth remains due to the CCP’s unwavering stance on its Zero-Covid policy. Snap lockdowns of major cities have become the norm in China in 2022, with Tangshan being one of the latest cities to have restrictions implemented. Tangshan is located around 100 miles west of Beijing and is known as a major steel hub, with around 13% of the country’s steel produced in and around the city, according to Bloomberg. Steel production levels will, of course, suffer throughout the course of these restrictions being implemented, as they did when Tangshan was put under lockdown back in March of this year.
Across many commodity markets at present, from Copper to Crude as well as Iron Ore, bullish speculative sentiment is partially being driven by the prospect of a massive surge in demand when China fully embarks on life post-Covid. Until that point, any market outlook is vulnerable to being undermined at a moment’s notice by another announcement of a major city lockdown. One of the advantages of ChAI’s platform, in comparison to other forecasts, is the daily updates of the models, allowing ChAI’s price predictions to be much more reactive in adapting its outlook in the wake of these events.
