Iron ore the sleeping giant wakes but what is next

Okay, overnight, the iron ore price gave back the day prior’s move and fell 2.4% on Thursday, taking the iron ore seaborne price back to US$128.14, as news came out that Brazil’s rain will ease, paving a way for mining to return to normal for Vale. So now...the iron ore price is knocking on a key technical level. So what’s ahead? Will iron ore’s rally continue and support the iron ore heavy weights stocks rebound?

Firstly - what is iron ore used for and why is it important

Iron ore is the key ingredient in steel. It is the world’s second most traded commodity behind crude oil. And is Australia’s largest export and contributes 5% to Australian GPD.

China is the world’s biggest buyer of iron ore, importing 70% of its iron ore needs. China is also the world’s biggest steel maker. China’s steel mills import iron ore from global miners such as BHP, Rio Tinto, Fortescue Meals, Vale and Anglo American. However China is working toward reaching carbon neutrality by 2060 and rapidly cut back steel production in July last 2021 to clear smog ahead of this years Winter Olympics (in Beijing, Feb 2022). That essential triggered the iron ore price to fall out of bed in July 2021 and fall 60% from US$214, to US$89.50 in November 2021. But since hitting that bottom, around November 23, iron ore slowly started to claw out of its bear market and gained 42% to where it is today.

Globally, so far this year and month to date, it’s really important to note, iron ore stocks and broad commodity stocks, have produced some of strongest gains, out of all the global themed stocks we track (for more please see our equity theme baskets). 

Recent iron ore developments

On the positive side, what to note;

• China’s steel output is slowly improving but is still at low levels. Shipment leaving the Pilbara (Western Australia) are also increasing.
• Iron ore orders will be volatile but pick up again in March. So, ahead of the Luna new year holidays starting on January 31, orders are expected to pick up before slowing again. The holiday ends February 15, but China’s Winter Olympics will be underway then (starting February 4) and wrap up February 20. So after that, Beijing is likely to very slowly increase its bulk buying of iron ore again with China’s steel mills ramping up from March onwards. But this is a wait and see. 
• Less than two weeks into 2022, China announced or kick-started 3 trillion yuan ($471 billion) of major infrastructure projects according to data from China’s provincial governments. That’s massive compared to the 1.2 trillion yuan in infrastructure projects announced from January 1-19 last year. That said, we’d need to see more stimulus announced from China to move iron ore up again. And I expect China will do that, as it wants to aggressively grow its economy (and infrastructure is key, with steel being needed).
• Morgan Stanley recently pointed out it has a short-term bullish view that steel production could grow 25% by 2Q22 versus the Oct-Nov levels. However, if China maintained its 4Q21 steel production in 2022, its full-year output would be down by the order of 15% year-on-year. And this would make the country's widely anticipated 5% GDP floor target pretty harder to achieve, given the continued importance of steel-intensive activities for China's economy

On the negative side, what to watch;

• China’s port inventories of iron ore are high, apparently just 10 million tonnes shy of the all-time high of 157mt in Mar-2018. Meaning China has a heck of a lot of idle iron ore, which is keeping the iron ore price from galloping ahead.
• China’s property sector is looking shaky and keeping gains in check. China’s biggest developers are in financial distress. Evergrande has recommenced work on over 60 major projects, but we still don’t know the fate of China’s property sector…if it will more of less collapse or continue on some sort of growth trajectory, supported by China’s bank cutting interest rates. In this regard, Morgan Stanley also notes softer full-year property demand will mostly be offset by modest growth in infrastructure investment (which Morgan Stanley expects to rise +6% in 2022), and machinery sales (to rise 3% yoy) and other end-market growth.
• China wants to reduce its reliance on imported iron ore, given it imports 70% of its iron ore needs. New mines in China are being commissioned and local governments are encouraging western miners to resume production after domestic output back peddled in 2021. Bloomberg estimates China’s iron ore output could rise 4.3% to 268 mt in 2022 vs a year earlier, after a 3.7% decline in 2021.
• West Africa’s Simandou iron ore deposit is said to be one of the biggest un tapped iron ore reserves and production is expected to come to the market, supplying 200 million tonnes. We will be looking for further clues as to when production might kick off as that could knock the top of iron ore’s rally.

Iron ore technical update

Saxo’s Technical Analyst Kim Cramer Larson pointed that iron ore has slowly been approaching resistance at around US$132.60. It is performing what looks like an ABC correction, which usually follows after a 5 wave move. A close above 132.60 is likely to extend the rebound to US$150-160. If rejected there is risk down to around US$108. If that scenario is to play out first warning could be RSI breaking below the rising trend line.