Iron ore faces a bleak outlook

China's slowdown bites as headwinds gather for other commodities in 2025
 

By Carly Fields

The world's largest iron ore consumer, China, continues to grapple with a sluggish economy, particularly in its crucial property sector. This has had a significant impact on iron ore demand, driving prices down over 20% year-to-date.

"Iron ore is among the most vulnerable to China's slowdown risks, as the country's property market constitutes the bulk of steel demand," Ewa Manthey, commodities strategist at ING, said in a research note.

China's property sector, a major driver of steel demand, has been in turmoil. Despite a series of stimulus measures, including interest rate cuts and targeted support, the sector has failed to regain momentum. New home starts, a key indicator of future steel demand, have declined by over 20% year-to-date.

"[China's] recent stimulus policies have focused on clearing property inventories rather than boosting new starts, and this will limit the impact on steel demand as it requires new construction rather than clearing unsold stock," Manthey said.

To offset sluggish domestic demand, China has ramped up steel exports. However, this trend is expected to slow down as more countries impose trade restrictions and anti-dumping measures on Chinese steel products.

"A subdued domestic market has spurred exports this year. China's steel exports have hit their highest level since 2016, with volumes up more than 20% so far this year," Manthey noted. "This is, however, likely to slow down moving forward."

Diminishing global role

China's declining steel demand is reshaping the global steel market. The country's share of global steel consumption is set to fall below 50% for the first time in six years. As China shifts its focus to high-tech manufacturing and green technologies, the era of rapid steel consumption fuelled by infrastructure and property booms is drawing to a close, ING noted.

While demand remains weak, the supply side of the iron ore market is relatively stable. Major producers like Vale, Rio Tinto, BHP, and Fortescue have maintained production levels. However, high iron ore port inventories in China, which have reached record levels for this time of year, indicate abundant seaborne supplies and a potential imbalance between supply and demand.

Manthey remains cautious about the outlook for iron ore in 2025. She believes that the market's recovery hinges on a sustainable economic recovery in China. Until then, iron ore prices are likely to remain volatile and under pressure.

"The continued weakness in the property sector in China remains the main downside risk to our outlook for iron ore," she said. "With the recovery path for China still bumpy, the market will remain sensitive to Chinese policies and prices are likely to remain volatile."

Wider picture

In its Commodities Outlook 2025, ING anticipates a mixed bag for other commodities in 2025, with key risks looming on the horizon.

While the commodities complex has shown resilience this year headwinds are gathering for 2025, according to the report authors Warren Patterson, head of commodities strategy at ING, and Manthey.

"We came into 2024 with a cautiously optimistic view on the commodities complex, and looking at the complex as a whole we think this has turned out to be the right view,” Patterson and Manthey said.

The initial strength in industrial metals has waned. "Industrial metals started the year on a strong footing, but this rally has run out of steam and it's clear that short-term fundamentals remain bearish.”

The energy landscape, meanwhile, presents a mixed picture. While geopolitical risks in the Middle East have persisted, oil prices have weakened. "Price action in oil has been odd, with prices weakening despite a significant amount of geopolitical risk in the Middle East," said the report.

ING anticipates modest oil demand growth in 2025, driven by both cyclical and structural factors. Coupled with strong non-OPEC supply growth and ample OPEC spare capacity, this points towards a potential oil market surplus next year. "For now, we expect the oil market to be in surplus next year – although much will depend on OPEC+ production policy," Patterson and Manthey said.

Natural gas markets have exhibited a different trajectory. "For European natural gas, we are cautiously bearish on prices through 2025, but this hinges on developments over the winter.” A normal winter and the ramp-up of new LNG export capacity should allow Europe to replenish gas storage adequately, even without Russian pipeline gas. However, Patterson and Manthey highlight a more bullish outlook for US natural gas prices due to increased LNG export capacity.

Uncertain metal outlook

Looking ahead, the outlook for industrial metals is uncertain. "The outlook for industrial metals looks somewhat cloudy, with trade frictions and potential changes to the Inflation Reduction Act in the US weighing on metals," said the report. The effectiveness of recent Chinese stimulus measures in boosting metal demand remains to be seen, adding another layer of uncertainty.

Agricultural markets face their own set of challenges. "Grains are likely to get caught up in any trade friction, particularly if we see retaliatory tariffs targeting US agricultural exports as we did in 2018,” Patterson and Manthey said.

Weather patterns will continue to be a major factor, especially for soft commodities. "Weather remains a key risk and concern for soft commodities, and so we expect volatility in cocoa and coffee to continue into 2025 – at least until we get a better idea on how supply shapes up for next season.”

Overall, ING maintains a cautious outlook for the commodities complex in 2025: “We hold a somewhat bearish view on large parts of the commodities complex for 2025 on the back of relatively comfortable fundamentals, while expectations of a stronger USD should also provide some headwinds," the report concluded. "In addition, external risks facing markets appear to be skewed to the downside."