Material Matters: Copper; Iron Ore; Chinese Property

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A glance through the latest expert views and predictions about commodities: the potential for a copper price rally; iron ore unlikely to fall meaningfully; Chinese property market dynamics remain grim.

By Greg Peel

Copper’s Pending Rally

Since mid-2023, UBS analysts have been pivoting towards a more constructive view on copper, believing the market is closer to a fundamental inflection point.

In early 2024 industrial metals have faced top-down (macroeconomic) headwinds, UBS notes, including limited signs of improvement in China’s macroeconomic or property market data, no clear signals of sustained restocking or metals demand improvement in Europe and the US, and a stronger US dollar due to expectations for Fed rates cuts being pushed out further into 2024.

In contrast, bottom-up (industry specific) developments for copper mine supply have been unambiguously positive, UBS suggests, with material downgrades to 2024 mine production guidance pointing to limited supply growth. But copper price upside has been capped by weak physical markets due to strong refined output and lacklustre demand.

The analysts believe refined supply will come under pressure in the next three to six months as shortages of concentrate bite and “traditional” drivers of copper demand begin to improve, supported by restocking.

UBS forecasts a meaningful deficit in 2024, in excess of -300kt, driven by a sharp slowdown in supply that more than offsets the expected deceleration in global copper demand growth.

The copper project pipeline is getting smaller, the analysts note, executing on projects and/or sustaining output appears to be getting harder, and in recent years the market has been far too optimistic on supply growth.

In UBS’s view, the probability of a rebound in mine supply of more than 5% in 2025 is low, and if/when the market moves into deficit in the second half of 2024, tightness is likely to persist for an extended period.

UBS has lifted its copper price forecasts to US$4.50/lb (US$9900/t) in 2025 and US$4.75/lb (US$10500/t) in 2026. Copper last traded (spot) at US$3.84/lb (US$8526/t).

UBS includes Sandfire Resources ((SFR)) in its list of preferred global copper pure-plays.

Whereto for Iron Ore?

The iron ore price confounded analysts for most of 2023, with a price pullback seen as inevitable in the midst of China’s property crisis and a lack of implicit demand for steel in further construction. But this has not come to pass.

The spot price has come off its peak above US$120/t but despite the odd stumble, has not fallen below US$100/t, let alone down to the lower prices some analysts were assuming.

The last couple of weeks have seen the price gradually dipping, Morgan Stanley notes, on concerns of rising inventories at Chinese mills, as post Chinese New Year restocking has not appeared as it normally would.

The down-swing has naturally added fuel to the negativity already surrounding China's demand story, Morgan Stanley suggests. These concerns continue to centre on property, with the latest data points not yet showing any sparks of life and persisting deflation. Sales value of the top 100 Chinese property developers fell -51.6% year on year in February, the analysts note.

But looking beyond the headlines at the core indicators gives Morgan Stanley comfort that nothing appears to have fundamentally deteriorated on the demand side, and a longer-term view of the iron ore price indicates that this correction should be seen in the context of mini-cycles around a long-term rising trend line, pointing to opportunities to buy the dip, which was found at around US$100-110/t in the last trough.

For now, there seems little to threaten this long-term trend, the analysts suggest, with the major producers needing to spend more to stand still. Commitments to dividend pay-outs and more stringent environmental targets add to the fully loaded costs the iron ore price needs to account for in through-cycles.

Chinese inventories at ports and mills are often looked to as a barometer for the health of iron ore's fundamentals, but Morgan Stanley can't see evidence of concerning shifts here. The stock build that was seen over January and early February, although stronger than in 2023, does not seem unusual relative to the seasonal patterns established in prior years.

The Elephant in the Room

What the above two articles have in common is the Chinese property market.

ANZ Bank economists estimate China’s unsold residential property had surpassed 3bn square meters by year-end 2023. It would take 3.6 years to digest the inventory, they suggest, much longer than the previous downturn of 2.3 years in 2014.

Beijing’s financial bailout will help improve project activity, ANZ suggests, but the increase in future supply and persistently weak demand will push the inventory level even higher. Home price will be under sustained downward pressure.

The Chinese government has quietly announced a two-tier housing policy for 2026-30 with affordable housing dominating future supply. But the private property market will likely be structurally weak going forward, ANZ believes.

ANZ Bank does not believe interest rate cuts can lift home sales in 2024. The savings from less mortgage interest will likely be diverted to household deposits or affordable spending instead.

We recall that the downfall of Chinese property giants such as Evergrande were exacerbated by off-the-plan buyers refusing to make further partial payments on apartments that were no longer progressing to completion, due to the company’s perilous debt situations. Why would you?

How could one small cut to mortgage rates lead to Chinese buyers being again happily willing to enter a fraught market?

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