Why iron ore will stay strong this year even if Chinese demand falls off

When Australia had the temerity to back calls for an investigation into China’s handling of the Covid pandemic, Beijing slapped a ban on importing Aussie goods.

Australia’s coal, timber and barley all felt the chill, but not its biggest export - iron ore. President Xi left that off the banned list. What does that tell you? That China’s need for iron outweighs even the most extreme PR instincts of its dictatorial regime.

This has been good news for Rio Tinto (which upped its output forecasts today) and everyone else with an interest in an iron ore price that’s rocketed since April.  

China needed Aussie iron to turn into steel for the factories behind its miraculous economic recovery in 2020.  

The question now is, how long will that last?

It’s a tricky one, because much of the demand was artificially created by Beijing’s stimulus programme. China pumped huge state resources into its factories to keep the economy afloat during the pandemic when consumer spending crashed to a halt.

As Chinese shoppers start spending again, that stimulus will be eased, along with factories’ demands for steel. Chinese iron ore buying should fall.

But that won’t necessarily hit prices. Rather, it will mean the world is returning to normal, so the rest of the world will be buying instead.  

For all its size, China is still a marginal buyer of iron, picking it up when prices are low and producers are desperate to shift it. When the rest of the world - the core buyers - start buying again, it will be at high prices. Iron ore is in for another good year in 2021.