China’s real estate market declines to boost iron ore supply

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

How will things develop this year in terms of demand, supply and price?

Stimulate demand

According to an RBC Capital Markets report that analyzed November data, China’s steel demand in the fourth quarter topped 744 million tonnes of annualized implied finished steel consumption – well below estimates for the quarter – but the government’s contribution should soften the blow.

And the very drop in steel consumption at the Asian giant is seen as a melting pot of things to come when it comes to iron ore.

“Although sentiment has recovered and iron ore is at an all-time low, the medium-term outlook remains challenging. Absent a booming property market in China – and we see increased potential for hard landing – the iron ore market is in structural surplus,” says the RBC report.

The study predicts a growing surplus that will take prices back to recent lows with an expectation of $75 per ton throughout the year, averaging $100 per ton, as the market is set to stabilize at new.

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

Price Outlook

Right now, the price of iron ore is around $130 a ton, while inventories rose an annualized 120 million tons in the fourth quarter. Since the company’s last update, supply has reached 72 million tonnes, as weather conditions in Brazil have played a role in keeping production high.

Thus, this year, iron ore is expected to have a surplus of 70 million tonnes, as global supply will continue to grow at a modest rate of 1.8% between 2022 and 2025 (CAGR). However, demand is expected to grow at a low rate of 0.7% over the same period “as EAF’s market share continues to grow and China’s rebasing removes a key growth market.” “.

Additionally, the demand forecast for 2022 remains mostly unchanged as slightly weaker demand in China was offset by “better than expected demand” in the rest of the world last year, which may continue.

“We expect prices to fall through 2022 from $130 per ton in the first quarter to $70 per ton in the fourth quarter and $75 per ton thereafter as the surplus comes out. Premiums and discounts are likely to follow a similar trajectory, and freight prices are also expected to decline, as seen in recent weeks. »

The China case

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

The current situation for Chinese real estate is difficult as it increased by 0.2% between July and September compared to the second quarter of last year.

Indeed, in November, the production of construction-related raw materials such as steel and cement fell by around 20% year on year, a trend which accelerated again in the case of steel.

According to a survey by the China Iron and Steel Association (CISA), production in the middle of the third of December fell by more than 2% compared to the first ten days of this month. During this period, the price of iron ore – which is used to make steel – rose above $120 a ton, on hopes that higher production levels at major maker China Steel Corporation would boost Requirement.