China’s steel demand will slow down. That could push iron ore prices down nearly 30%

Iron ore prices could fall by as much as 28% by the end of 2023 as China’s steel demand and production are likely to fall, experts predict.

Morgan Stanley analysts say iron ore prices will fall, citing subdued output from the world’s top steelmaker China and the country’s shift to steel scrap.

“Our base-case forecast for 2H23 is $90 per tonne,” said commodity strategist Marius van Straaten and a team in a March 20 report.

That’s about 28% less than the current $126 per tonne for iron ore at a 62% grade.

Iron ore is primarily used to make steel, a key material in construction and engineering projects – and both Asian nations are on track to use more.

The Commonwealth Bank of Australia also forecast a fall in iron ore prices, expecting them to hit $100 a tonne by the fourth quarter of this year “as China’s steel demand eases in the second half of the year,” the bank’s analysts said last week.

Analysts say there is still upside potential for iron ore prices in the coming months as China reopens and eases Covid-19 restrictions. However, they do not expect the strength of Chinese steel production or demand to continue beyond the second half of this year.

China’s pent-up steel demand is likely to ease in the second half of the year, CBA forecast at its key policy meetings in March, citing China’s conservative economic and political agenda for 2023.

China, that accounts for 70% of world iron ore importsforecast a growth target of around 5% for 2023.

Plans to centralize iron ore purchasing in China under the state-owned China Mineral Resources Group (CMRG) could also contribute to lower prices in the long run. The CMRG was established to purchase raw materials for the Chinese steel industry.

“If the CMRG can exercise China’s market power over iron ore producers, it should mean lower-than-usual prices in the long run,” CBA said.

Fitch Solutions expects China’s domestic steel demand to slow in the coming decade compared to the last one as the “rebalancing of the economy away from heavy industry and toward services” resumes following the downturn in the real estate market.

“Stronger demand growth in India, the US and emerging markets in general is unlikely to offset the net effect of a slowdown in China,” the finance and insurance company said in its March 23 report.

Demand for iron ore is also being challenged by China’s ambitions to increase steel scrap consumption, an alternative material used in steel production.

At the beginning of March, This was announced by the Chinese Ministry of Industry and Information Technology that the country will increase its steel scrap consumption to 265 million tons this year, up 25% from last year’s 19%.

Morgan Stanley estimates that China’s iron ore consumption will be reduced by about 17 tons per year for every 1% increase in scrap consumption.

Global crude steel production fell 1% yoy in February after also contracting in January.

The declines were caused by falling production at the world’s largest steel producers.

According to data from the world steel associationTop producers such as Japan, the US and Russia suffered production cuts of 5.3%, 5.3% and 8.6% respectively.

While the reading isn’t as steep as January’s 3.3% decline, Fitch expects limited output growth to continue throughout the year as large steel companies continue to grapple with high input costs.

China, the world’s leading steel producer, is allegedly wants to cut steel production in 2023 According to Bloomberg, for the third year in a row.