Optimism for China's continued economic recovery remains undimmed among Australia's major iron ore producers despite signs of prolonged weakness for China's steel sector.

Chinese steel mills geared up in the fourth quarter of 2022 and the first quarter of 2023 for an anticipated boost in domestic demand after the zero-COVID policy was lifted, according to Pranay Shukla, S&P Global Commodity Insights' lead analyst for dry bulk commodities. In April, Fortescue Metals Group Ltd., Rio Tinto Group and BHP Group Ltd. all reported record high iron ore production in recent months.

But China's import demand is set to weaken in the second quarter as steel margins remain under pressure, prompting mills to turn to low-grade material, particularly from India, Shukla said.

China is expected to scale back steel production in the coming months due to weak demand, according to Commodity Insights' Metals and Mining Research team. The analysts expect prices to fall in the June and September quarters, averaging $116.66 per metric ton and $104.00/t, respectively, compared with a 2022 average of $120.40/t. China accounts for up to 70% of global iron ore imports, Commonwealth Bank of Australia said in an April 20 note.

New Fortescue Metals CEO Fiona Hick acknowledged the demand concerns after the company booked record iron ore shipments for the nine months to March 31, but said she remains optimistic about China's crude steel production and demand for 2023 and beyond.

"Our analysis suggests that demand in China is actually going to increase year on year," Hick said during an April 24 earnings call.

Fortescue expects increased production rates for steel and pig iron and continued inventory draws, Vivienne Tieu, director of sales, marketing and shipping, said during the call.

"Looking ahead, economic growth is a key priority for China in 2023 and we think that this is supportive of the iron ore market," Tieu said. "Given where steel margins are at the moment, they are challenged, so we continue to see preference for products like ours and we expect that to continue."

Reaffirming positive outlooks

Rio Tinto also sees a continuing recovery in China, reporting that steelmakers in the country ramped up their blast furnace capacity utilization rates to more than 90% during the March quarter. The iron ore producer logged record first-quarter shipments from its Pilbara operations.

"The government is looking to spur domestic consumption, stabilize the property sector and further support infrastructure investments to realize its 2023 GDP target," Rio Tinto said April 20 in its latest quarterly production statement. "Consumption is expected to normalize and recover further with household incomes supported by job creation amid government efforts to boost business."

BHP Group's Western Australia Iron Ore business booked record production for the nine months to March 31, with the South Flank operation contributing to record year-to-date iron ore lump sales. The company achieved the record despite flat iron ore production during the March quarter year over year, which was due to a suspension of all operations following a fatality at its rail yard in Port Hedland in February.

"Recent engagements with customers in China and India have reaffirmed our positive outlook for commodity demand, with China's economic rebound and solid momentum in India's steelmaking growth helping to offset the impact of slowing growth in the US, Japan and Europe," BHP Group CEO Mike Henry said in an April 21 news release.

Property recovery concerns

The IODEX 62% iron ore price dropped to $112.15/t on April 21, its lowest level since December 2022, according to Commodity Insights. "While there have been signs of improvement in China's beleaguered property sector, a full recovery still seems someway off and, as a result, is unlikely to significantly benefit steel demand in 2023," analyst Ronnie Cecil said in an April 21 note.

Citi lowered its three-month price outlook for iron ore to $100/t from $120/t, in an April 24 note. "The weak steel demand and steelmaking margins have started to negatively feed through into the iron ore market as hot metal production growth started to roll over and port inventory started to build," the analysts wrote.

"We have been cautious on China's steel demand and iron ore amid an uneven economic recovery and heightened policy risk, though things have unraveled sooner than our base case," Citi said, warning of "further downside risk towards $90/t, where we see meaningful cost support."

Commonwealth Bank of Australia sees mixed sentiment for China's beleaguered property sector: Flat property sales are showing signs of stabilizing year over year, while new property sector construction contracted about 29% year over year in March.

"The result underscores our concerns over China's steel demand over the course of 2023," Commonwealth Bank said in an April 20 note. They expect iron ore prices to fall to $100/t by the fourth quarter of 2023 as China's steel demand eases in the second half of the year.

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