Macro Intelligence: China’s economic impact on Australian iron ore

Article written by Nadine Blayney (ausbiz)

The China connection

The name of the game in iron ore is China.

Spot iron ore prices have stabilised in recent months, following price falls of around 30% in the March quarter. The recovery reflects inventory restocking and improved demand, as Chinese industrial production rebounds, and after Beijing unveiled a flurry of stimulus measures to revive its struggling property market.

Globally, growth in steel production has been flat so far in 2024. However, the Australian Department of Industry, Science, and Resources expects a gradual improvement in global industrial output and says further stimulus-related infrastructure activity should support a pickup in global steel output in the second half of 2024.

Iron ore remains Australia’s top commodity export. While the Australian Government’s June 2024 Resources and Energy Quarterly forecasts lower prices over the next two years, it is expecting volumes to increase by 2.3% a year.

Australian resources and energy exports

China's impactful stimulus measures

The next driver of the iron ore price could come from China’s upcoming plenum held from 15-18 July, during which Chinese authorities will focus on deepening reforms and promoting the modernisation of China. This is the third plenary session since its members were selected for a five-year term in 2022; previous third plenums have led to big policy changes. Investor hopes for further property sector stimulus remain high.

The Commonwealth Bank, for one, does not expect big-bang stimulus for the property market coming from the third plenum. It sees China’s steel output tracking sideways as falls in property are offset by infrastructure spending, leading to a stable iron ore price of about US$100-US$110/tonne in the second half of 2024, with upside risk to that price forecast for the latter part of the year.

“If we see China really struggle to achieve its 5% economic growth target, to put some of that growth pressure at ease we could see policymakers move towards infrastructure support,” Vivek Dhar, CBA Director of Mining and Energy Commodities Research, recently told Ausbiz.

Morgan Stanley's bullish outlook

Morgan Stanley also sees upside for the iron ore price towards the end of the year. It expects relatively high stockpiles of iron ore at Chinese ports will remain a headwind for prices of the steel ingredient over the next couple of months but says that should change in the fourth quarter. Morgan Stanley has an average price forecast of US$120/tonne and says it is one of the mined commodities analysts are most bullish on for the final months of 2024.

Goldman Sachs expects the iron ore price to average US$100/tonne for the remainder of the year; its long-run price forecast for high-grade iron ore is US$78/tonne.

Citi is less positive on the iron ore price, expecting volatility ahead of China’s third plenum, with fundamentals suggesting downside risks. It’s maintaining its three-month price forecast of US$95/tonne based on muted steel demand, rising steel inventories, and steel output controls reducing demand.

UBS, meantime, calls iron ore fundamentals “weak” to end the second quarter on softer demand and strong supply, but it sees limited downside with support around US$90-US$100/tonne.

Mining matters

While Australian miners are still seeing significant cash generation selling iron ore into China at current prices, miners have broadly underperformed the ASX 200 and other global indices over the past three months. So is there value in some of the iron ore miners given the iron ore price outlook?

Total stock returns chart

• BHP (ASX: BHP)

Goldman Sachs has a ‘buy’ rating on BHP, despite expectations for reduced FY25 iron ore production; price target $48.40. It points to valuation, superior margins, and operating performance in the Pilbara iron ore producing region of Western Australia. Macquarie is ‘neutral’ on BHP ahead of its quarterly production report, expecting BHP’s iron ore performance will exceed consensus by 4%.

BHP daily chart

Analyst recommendations

• Rio Tinto (ASX: RIO)

Goldman Sachs has a ‘buy’ rating on Rio Tinto on valuation grounds, even as it has trimmed its 2024 and 2025 iron ore shipments forecast slightly: price target $137.00. Morgan Stanley lists Rio Tinto as one of its most-preferred mining stocks, citing its low-cost assets and ability to sustain robust cash generation through the cycle. It says shares are pricing in a long-term price below the spot iron ore price and marginal cost.

Rio Tinto daily chart

Analysts' recommendations

• Fortescue Metals Group (ASX: FMG)

Goldman Sachs has a ‘sell’ rating on Fortescue Metals Group; price target $16.20 on reduced FY25 iron ore shipments, increased iron ore capex, and expectations for reduced green capex. It also points to its relative valuation versus BHP and Rio Tinto.

UBS has lowered Fortescue Metals’ price target 15% to $18.90 based on rolling forward estimates, iron ore prices, and lower realisations. Morgan Stanley is ‘underweight’ Fortescue, pointing to weaker iron ore prices beyond FY24, and the company’s heavy investment in growth and decarbonisation putting pressure on free cash flow yields.

Fortescue daily chart

Analysts' recommendations