Australia raises Chinese iron ore demand forecast

Australian government commodity forecaster the Office of the Chief Economist (OCE) has raised its forecast for Chinese iron ore demand in 2020 but cut its projection for Brazilian exports by over a quarter.

The OCE has raised its 2020 Chinese demand forecast by 4.5pc to 1.21bn t from its previous projection of 1.16bn t in September, reflecting the impact of government spending on transport infrastructure including rail and road projects.

But it now sees Brazil's iron ore exports at just 269mn t, down by 26pc from its previous forecast of 366mn t, because of mine production problems at the country's largest producer Vale.

Strong Chinese demand and supply disruptions from Brazil have sent iron ore port prices to near record highs. The Argus-assessed ICX iron ore price settled at $159.75/t cfr Qingdao on a 62pc Fe basis on 17 December, just short of its six-year high of $160.30/t on 11 December.

The sharp rise in iron ore prices in recent months has been supported by robust demand in China linked to government stimulus measures, the OCE said in its latest Resource and Energy Quarterly report. It expects iron ore prices to remain well above $100/t until mid-2021 before easing to just over $75/t by the end of 2022.

China's iron ore demand is expected to remain high over the next 12 months, although Chinese steelmakers may seek to reduce production slightly should iron ore prices remain at a level that renders many of them unprofitable, the OCE said. Demand in many other countries is expected to stay below its 2019 level, with range of steelmakers in Europe and south Asia remaining on hiatus or shut down and not expected to return to production until iron ore prices drop.

But Chinese iron ore demand growth may be nearing its end. "Chinese demand for iron is likely at its peak, with a decline expected over the next 10 years as a growing share of its steel production is drawn from domestic recycling. This will result in reduced Chinese dependence on the seaborne iron ore market," it said.

Steel outlook

World steel consumption is likely to decline by 2.2pc in 2020 because of the Covid-19 pandemic and resulting economic downturn, but is expected to rebound by 3.8pc next year and then grow by 3.6pc in 2021, the OCE said. Steel production is expected to follow a similar pattern to consumption over the period.

China's September steel production was almost 40pc above the level a year earlier. "This has placed the country in a position of unprecedented dominance in steelmaking globally, with numerous other countries continuing to face manufacturing and steelmaking recessions," the OCE said.

China will release its 14th five-year plan for 2021-25 in March next year. The plan is expected to include a renewed focus on infrastructure rollouts and more rapid urbanisation, particularly in central and western China, which will in turn impact steel demand, the report said.

Steelmaking outside China is showing signs of recovery, led by growth in other Asian countries. South Korean production has recovered to around pre-Covid levels. India's steel production has shown solid growth in recent months, but it is not yet clear how rapidly its long-held plans to expand domestic steel production will proceed in light of disruptions related to Covid-19 and high iron ore prices, which affect the viability of proposed steel plants, the OCE said.

By Kevin Morrison