We believe that the overall price of iron ore will go weak in the second half of the year, and we may see prices stabilize and rebound by the end of the year. The main contradiction in iron ore in the second half of the year lies in crude steel production cuts. As steel mill profits are still low and the contradictions in the industry chain remain unresolved, steel mills are expected to cut production actively in the second half of the year.

In addition, active production cuts are being implemented on the policy side. The demand ceiling for iron ore is relatively certain and the supply increment is obvious in the second half of the year. With the weather improving and capacity being released in the second half of the year, we look forward to the shipments from the four largest mines. Domestically produced ore could also see some incremental volumes driven by the Keystone project. The supply of steel scrap is expected to pick up in the second half of the year, strengthening the substitution effect on iron ore.

The stabilization of iron ore prices in the second half of the year still needs to focus on the terminal demand. Only when the downstream demand gets better, black metal prices can stabilize and rebound. We expect iron ore prices to decline smoothly throughout the second half of the year, but at the end of the year, if thins in the real estate industry gradually get better and steel mill profits go up, we can still see the stabilization and rebound of iron ore price.

The Rise in Supply

As at 21 June 2022, total shipments from Australia and Pakistan were 544 million tonnes, down 6.37% from 581 million tonnes in the same period in 2021. Of this, Australia's iron ore shipments were 413 million tonnes, down 2% from 421 million tonnes in the same period in 2021. Brazilian shipments were 130 million tonnes, down 19 per cent from 160 million tonnes in the same period in 2021.

Both Australian and Brazilian shipments declined in the first half of the year due to the impact of bad weather and lagging capacity launches, with Australian mines surging higher in late June in Australia's financial year. VALE, on the other hand, uses a natural fiscal year, so shipments were lower in the first half of the year.  

Our assumptions for the increase in Australia and Pakistan shipments in the second half of the year are that we believe the four largest mines will meet their annual shipment targets. We have reviewed the shipment targets and actual achievement rates for the four largest mines over the years and found that BHP, FMG and VALE have all met or exceeded their annual shipment targets. Rio Tinto met 95% of its target but reduced its shipment target by 3% this year.

As at 17 June, BHP and FMG were the mines of the Australian financial year with a completion rate of around 96%. And with new capacity coming on stream under the new fiscal year, both BHP and FMG expect their targets to rise for the new fiscal year. Rio Tinto and VALE, on the other hand, follow a natural fiscal year and are already halfway through the year with completion rates of only 42% and 34.6% respectively. With Rio Tinto's new mine coming on stream in June and the weather turning in Brazil, we expect a peak in shipments in the second half of the year.

The Decline in Demand

The basic contradiction of iron ore in the second half of the year may still be on the demand side, especially in the increasing expectations of crude steel production cuts. The real estate end of the second half of the year may have a small rebound, but in terms of corresponding steel demand may still be insufficient. The infrastructure end has become an important end of growth stabilization, but the overall decline in hedge against real estate demand is still weak.

According to our statistics and research, the current market consensus is to reduce crude steel production by approximately 5% for the year, or approximately 50 million tonnes for the year. According to our calculations, the first half of 2022 has already seen a reduction of approximately 35 million tonnes, which means that a further reduction of 15 million tonnes is required in the second half of the year.

As the reduction in crude steel production has already started in the second half of last year, if the reduction continues on the basis of the second half of last year, then this amount is relatively large and the upper limit for iron in the second half of the year will be lower.