At US$136/t, the price of iron closed 2023 at its highest level, posting a 15% appreciation, against most forecasts and at odds with a weak Chinese economy. How can we explain this performance and how sustainable is it? 

Although China’s GDP growth is likely to reach the government’s target of 5%, the Chinese economy was relatively disappointing in 2023 with subdued domestic consumption and a weak property market. Moreover, markets’ expectations for effective stimuli measures failed to materialise, as the Chinese authorities mostly relied on monetary policy.

Iron ore prices started 2023 on a strong note, with the market anticipating a robust post-COVID recovery, but subsequently dropped owing to weak conditions. However, since mid-August, iron ore prices have risen by about 30% from US$104/t to US$136/t.

The first reason for this increase is China’s strong steel production. Total 2023 production could reach 1,030-1,040Mt, not much lower than 2020 record production of 1,065Mt. Such a number can look surprising, given the weakness of the property market and the construction sector. However, steel exports are forecast to increase by about 35% to an annualised volume of 90Mt, mostly driven by a weak currency. Although showing a late rebound, the RMB posted a 5-8% depreciation vs the US dollar during most of the year, largely because of the Central Bank's loose monetary policy. The main export markets were Southeast Asia and the Middle East. Strong exports, therefore, more than offset the weakness of the domestic demand.

The second reason is the laxer environmental stance taken by the Chinese authorities because of the weak economy. No restrictive measures were issued and Chinese steel mills produced at full capacity, with blast furnaces’ utilisation rates often exceeding 90% during the year, despite skinny margins. This is not uncommon in China, with mills often unwilling to cut production to avoid the risk of losing market share. In 2023, Chinese imports may have totalled 1,180Mt of iron ore vs 1,100Mt in 2022.

The third reason is limited seaborne supply increases in 2023. Rio’s Gudai Darri and FMG’s Iron Bridge mines are in their ramp-up phases while Vale has been impacted by various operating issues at Carajas. Initial guidance for 2024 also suggests a small output increase for all the large miners.

The fourth reason is the drop in port stocks due to strong demand and constrained supply. From 140Mt in early 2023, they dropped to about 100Mt in October before rebounding to 120Mt later in the year, in line with lower steel production.  

The fifth reason is that markets seem to genuinely believe that the Chinese government will go ahead with stimulus measures. In October, China unveiled a plan to issue 1 trillion yuan (US$139bn) in sovereign bonds by the end of the year, raising the 2023 budget deficit target to 3.8% of GDP from 3%.

The current rally has the potential to continue in Q1 2024. Spring is the strongest season for construction in China, with steel mills typically building iron ore inventories during the first months of the year. In addition, the rainy season in Brazil and the cyclone season in Western Australia often impact seaborne shipments in the first quarter of the year. Despite a recent rebound, port stocks are not high, and should the Chinese government go ahead with fiscal measures, iron ore demand and prices could again surprise on the upside.