Bank of America warns weak steel demand will mean "further room to the downside" for iron ore prices.
"In our view, with our base case of annual crude steel production in China dropping by 6% year-on-year, we could theoretically justify a decline in iron ore prices to $80 per tonne, given historic relationships between steel production and iron ore prices," the bank stated in a July 12 research note to clients.
"At that level, marginal iron ore producers would be under severe pressure, with about 20% of operators loss-making. This would in all likelihood prompt another round of production cuts, so we are comfortable with our average 1Q23 forecast at $100 per tonne."
"Even in more optimistic scenarios, i.e. flat production and a 5% output boost," the report stated, "prices should remain below intra-year highs within a $107-130 per tonne range."
As a result, BofA forecasts the iron market will "flip back into surplus."
Steel demand in China so far this year has already fallen by 10% on average year-on-year, "largely driven by the property sector, with housing starts experiencing a staggering 42% year-on-year decline in May."
According to the bank, in the first five months of the year, China's production of crude steel totalled 435 million tonnes, an 8% decline compared to the first five months of 2021.
"Iron ore has pulled back significantly since hitting $150 per tonne in 1Q22, which we believe is the pain threshold for China's government, i.e. around that level authorities have shown discomfort in the past," the report reads. "Indeed, with prices falling as low as $110 per tonne last week, the market is now down 30% from the peaks seen in the aftermath of the Russian invasion of Ukraine."