China's Property Market Decline To Send Iron Ore Supply Up

The China Evergrande Group (HKG:3333) crisis has had a mammoth of an impact on the metals market. For instance, in the fourth quarter last year, demand for steel in the country dropped lower than analysts’ expectations, and in the case of iron ore, the stage is set for low prices and growing surplus at a global stage.

How will things shape up this year in terms of demand, supply, and prices?

Driving Demand

According to an RBC Capital Markets report that analyzed data from November, China’s steel demand in Q4 topped 744mt of annualized implied finished steel consumption —this is far lower than estimates for the quarter— but governmental input is set to dampen the brunt. 

And the very drop in steel consumption in the Asian giant is seen as a brewing pot of things to come with regards to iron ore. 

“Although sentiment has picked up, and iron ore is off its lows, the medium-term outlook remains challenged. In the absence of a booming property market in China —and we see increased potential for a hard landing— the iron ore market is in a structural surplus,” the RBC report asserts.

The study anticipates a growing surplus that will revert prices to recent lows with an expectation of $75 per ton through the year, with an average of $100 per ton —since the market is bound to level off again. 

“The higher structural cost environment however lifts our long-term price assumptions to $75/t from $65/t.”

Price Outlook

At present, the iron ore price is at around $130 per ton while inventory rose at an annualized 120mt in the fourth quarter. Since the firm’s last update, supply has reached 72mt as weather in Brazil has played a role in keeping output high. 

So, this year, iron ore is expected to have a 70mt surplus as global supply will continue to grow at a humble 1.8% pace between 2022 and 2025 (CAGR). However, demand is anticipated to grow at a meek 0.7% rate over the same period “as EAF market share continues to grow and China's rebasing removes a key growth market.”

Further, the demand forecast for 2022 remains mostly unaffected as the slightly tamer demand in China was balanced by the “better-than-expected demand” in the rest of the globe last year —something that might continue.

“We expect prices to fall through 2022 from $130 per ton in Q1 to $70 per ton in Q4 and flat at $75 per ton thereafter as the surplus comes out. Premiums and discounts are likely to follow a similar path, and freight prices should also soften, similar to what’s been seen in recent weeks.”

The China Dossier

In November alone, infrastructure investment in the Asian giant fell 4.6% from a year earlier, according to Goldman Sachs estimates. In addition, that same month, the sale of real estate and new homes decreased by 20% compared to levels reached in 2020. 

The current Chinese real estate situation is tough as it grew 0.2% between July and September, compared to the second quarter last year. 

In fact, in November, the production of raw materials linked to construction such as steel and cement fell by around 20% year-on-year —a trend that has picked up again in the case of steel.

According to a survey by the China Iron and Steel Association (CISA), output in the middle third of December fell more than 2% from the first ten days in that month. In that period, the price of iron ore —which is used to make steel— exceeded $120 per ton, hoping that higher production levels from the main manufacturer, China Steel Corporation, would boost demand.