Chinese Policies Propel Iron Ore Prices Amid Production Cuts

On Friday, July 5, 2024, iron ore futures dropped due to reduced hot metal production, yet prices targeted a second weekly gain driven by hopes for more Chinese economic stimulus.

The September iron ore contract on China’s Dalian Commodity Exchange DCE fell by 2% to 845.5 yuan ($116.3) per ton.

This followed a one-month high reached the previous day. For the week, the contract rose by 3.2%.

Similarly, August iron ore on the Singapore Exchange dropped by 3.3% to $110.2 per ton, despite an earlier 3.6% rise.

Early-week gains were relinquished due to profit-taking and lower hot metal production.

Consultancy Mysteel reported a 0.1% drop in average daily hot metal output among surveyed steel mills, reaching about 2.39 million tons by July 4.

Analysts from Galaxy Futures noted some mills, facing losses, were reluctant to boost production. This limited the potential for higher hot metal production.

Hopes for economic stimulus from China kept prices buoyant. The third plenary session, scheduled for July 15-18, will focus on reforms and modernization in China.

Analysts expect further policy support for the economy, particularly in infrastructure and manufacturing sectors.

Iron ore prices have stayed above $100 per ton for most of the year. This is due to strong demand and low inventory levels in China.

The Chinese government has implemented various stimulus measures, including at least 1 trillion yuan for urban village renovation and affordable housing.

These measures aim to support the property sector, which drives about 40% of iron ore demand.

However, new home starts in the property sector have fallen sharply, reducing steel demand.

China’s steel production has remained robust, supported by strong domestic demand and increased steel exports. These exports reached over 75 million tons in the first three quarters of 2023.

However, potential production cuts to curb emissions might limit the upside for iron ore prices. Any production cuts will add bearish risks for the iron ore market.

The supply of iron ore remained balanced with slow growth. In 2023, top four miners produced 287 million metric tons in Q3, 2% less than the previous year due to operational issues and maintenance.

Brazilian and Australian exports faced constraints, impacting supply. Iron ore prices are likely to remain volatile, closely tied to Chinese policies.

Analysts expect prices to average $120 per ton in 2024, assuming continued government support.

The property sector’s recovery will be crucial for sustaining demand. However, any weakening in stimulus effects could pose significant downside risks.

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