Iron ore rally under threat as Chinese stockpiling set to slow
Iron ore prices have climbed toward $US100 a tonne on speculation of fresh Chinese stimulus, but analysts say the rally is unlikely to last as stockpiling slows.
A recent rebound in iron ore prices toward $US100 a tonne is unlikely to be sustained, with an expected easing of Chinese stockpiling and a wave of new supply from Rio Tinto’s much-anticipated African mine to put pressure on Jim Chalmers’s federal budget.
Iron ore futures in Singapore inched higher on Monday to $US99.75 a tonne, extending a three-week run of gains and pushing the price of the key steelmaking ingredient to its highest level since early April.
Adding support to prices is fervent speculation that China’s top leadership will soon meet to unveil new measures aimed at reviving the country’s debt-ridden property sector, which has struggled since authorities constrained heavily indebted property investors access to credit in 2021.
The still-unverified reports have breathed life into iron ore markets, which had previously declined for five consecutive months as China’s steel industry moved to scale back production and global supply remained elevated.
Westpac commodity strategist Robert Rennie remained cautious, projecting that prices would retreat below $US90 by year’s end as China pulled back on stockpiling and cuts to steel production continued. “China is furiously building metal stockpiles … and that includes iron ore,” Mr Rennie said, pointing to fresh trade data that showed Chinese imports for the key steelmaking ingredient climbed in June even as local steel mills moved to “aggressively curtail” output.
“When that stockpiling ends – that’s when we’ll see prices reflect fundamentals and the fundamentals imply prices below $US90 in our view.”
Threatening to drive the price lower still is Rio Tinto’s Simandou project in Guinea. The mine holds one of the largest untapped high-grade iron ore deposits in the world, with operations expected to commence in late 2025 or early 2026.
The expected decline in the iron ore price is likely to weigh on federal finances, which are heavily reliant on commodity export earnings.
In recent years, Treasury coffers have benefited from billions in royalties and tax revenue upgrades from the likes of BHP, Rio Tinto and Fortescue.
Asked on Monday whether the rally in the iron ore price could be sustained, the Treasurer pointed to conservative forecasts in the May budget, which predict the iron ore price will slump to $US65 a tonne by March 2026.
“Prices will bounce around a bit, and that’s why we have those conservative assumptions,” Dr Chalmers told reporters in Canberra.
AMP chief economist Shane Oliver was less bearish about iron ore prices, tipping they would hold above $US90 a tonne, but said revenue upgrades would not be as large as in previous years.
“We won’t be able to rely on it like we have in the past – sooner or later our luck is going to run out but it’s hard to predict when that’s going to occur,” Dr Oliver said.
“The upside surprise is still there, but the reality is that surprise is not as big as it used to be.”
Also forecasting that the recent rally in iron ore prices would hold was Micaela Fuchila, chief economist at Jarden, who suggested Donald Trump’s threat to slap a 50 per cent tariff on Brazil – the second-largest iron ore producer after Australia – could underpin demand for the steelmaking ingredient.
“Elevated uncertainty, trade diversion and tariffs could translate to higher demand for Australian and New Zealand products,” she said.
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