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Citi analysts bullish on iron ore prices, anticipating China's fiscal stimulus

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2023-11-23

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In a recent development, Citi analysts have upgraded their short-term iron ore price forecast to a staggering US$140 per tonne, citing China's anticipated fiscal stimulus measures. The upgraded outlook reflects growing expectations of a substantial and earlier-than-expected stimulus push from China's government, propelling iron ore prices to levels not seen since June 2022.

China's dwindling iron ore inventories, which have plummeted to nearly 7-year lows, coupled with speculators' optimism surrounding China's forthcoming fiscal stimulus, have driven the recent surge in iron ore prices. As of Wednesday, Singapore iron ore futures on the November contract saw a 0.3% increase, reaching US$134 per tonne.

Citi's analysts, including Wenyu Yao and Maximilian Layton, expressed their optimism in a note, stating, "We now expect in our base cases that China will likely increasingly push towards fiscal expansion to engineer investment-led growth, and this time with a focus on urban village redevelopment/affordable housing to support overall property market related activity in 2024." This shift in China's policy direction could potentially lead to an 8% year-on-year increase in new property starts in 2024, a significant shift from the previous 11% decline forecasted.

Citi predicts that the urban village redevelopment program, expected to develop approximately 1 billion square meters of floor space over the next five years, will spur construction activity, boosting property starts. Moreover, infrastructure is expected to remain a focal point of China's fiscal policies, potentially increasing demand for metals in the country's cyclical sectors.

Despite overbought conditions, Citi advises investors to consider buying iron ore during any dips until Chinese New Year. This recommendation aligns with historical iron ore price trends, which typically experience a bullish trajectory from November to February due to factors such as stockpiling, supply disruptions, and preparations for the Chinese New Year.

Recent data indicates the historical average gains during this period:

• Last five years: +21.1%
• Last ten years: +14.4%
• Last fifteen years: +18.3%

While iron ore prices have entered overbought territory, Citi's analysts draw attention to the Relative Strength Index (RSI), which suggests that iron ore prices have not been this overbought since previous instances in 2023, 2021, and 2021, each followed by notable market movements.

Fortescue (ASX: FMG) shares, often considered a reliable proxy for iron ore prices, are currently trading near all-time highs at the $25 level, reminiscent of peaks seen when iron ore prices were at US$165 and US$200 per tonne in 2021.

As China's fiscal stimulus plans unfold, the iron ore market remains poised for potential further gains, offering opportunities for investors to capitalise on the evolving landscape and market dynamics. Citi's upgraded forecast reflects a bullish outlook for iron ore, driven by expectations of significant government-backed investment in China's property and infrastructure sectors.

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