Is the iron ore price set to slide?

Iron ore prices could be in trouble according to some experts.

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Key points

  • The iron ore price has been performing well in recent weeks. It’s now above US$120 per tonne
  • However, Westpac is expecting that the iron ore price is going to fall over 2022
  • Strong steel production is not expected to return, with construction demand being subdued

The iron ore price has seen a recovery to above US$120 per tonne. But some experts now think that the commodity may have seen the best of the recovery and that it’s likely to fall back again.

In-fact, prices have risen by approximately 50% from a couple of months ago.

What has been causing the iron ore price to rise?

There may be a few different factors that have been combining to help iron recover.

Some of the gain may have been due to increasing steel production in China as well the possible expectation of more Chinse stimulus to help growth which could help recharge the economy, according to reporting by the Australian Financial Review.

But the rise of the iron price may have been boosted by the fact there has been very heavy rain in Brazil. Why does that matter? It made Vale, one of the world’s biggest iron ore producers, and others stop their production. This is impacting short-term supply.

However, the heavy rains weren’t going to last forever. The weather is reportedly easing in Brazil.

The AFR quoted Westpac Banking Corp (ASX: WBC) senior economist Robert Rennie who said:

You can see why the market is moving near-term spot prices higher because there are a lot of risks, but as we move through the first quarter and get a better understanding of stimulus in China post-Olympics, that’s when we see prices easing.

I expect to see prices peak in the coming weeks and begin to soften, assuming no other major weather events.

The Westpac economist doesn’t think that the Chinese steel production is going to return quickly according to the AFR.

The upcoming Winter Olympics is believed to be a key reason why China has implemented emission curbs and forcing some steel mills to drop production. Mr Rennie thinks that the steel production reductions will stay until the Olympics.

Mr Rennie also said:

I’m also not as optimistic as the market that we will see a sudden recovery in Chinese construction and steel demand. I think the low levels are a story in place for this year and beyond.

Where is the iron ore price headed?

Every analyst has their own thoughts on where the iron ore price is going to go. According to the AFR, Westpac is projecting an iron ore price of US$88 per tonne by the middle of 2022 and could go to US$75 per tonne by the end of this year.

The change in the iron ore price can have a big impact on the profits of Australia’s biggest miners including BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG).

But there are others that think that iron ore could continue to do well.

For example, Morgan Stanley reckons that a return to production in March 2022 could help prices climb a bit further.

The AFR quoted Morgan Stanley commodity strategist Marius van Straaten who said that even if China doesn’t allow full-year steel production to grow, the broker has positive a positive view for the next few months:

Even under such a no-growth constraint, we can see a potential 25 per cent increase in steel run-rates by the second quarter of 2022 versus October-November levels.

However, by the fourth quarter, Morgan Stanley recently forecast the iron ore price could drop to US$85 per tonne by the fourth quarter of the year.

Motley Fool contributor Tristan Harrison owns Fortescue Metals Group Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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