(The opinions expressed here are those of the author, a columnist for Reuters.)
PERTH - The risks to the bullish drivers of the spot iron ore price are rising as the market starts to question the nature and strength of China's economic recovery, while the chances of a global economic hard landing mount.
Benchmark 62% iron ore for delivery to north China , as assessed by commodity price reporting agency Argus, ended at $121.60 a tonne on Wednesday, a two-month low.
The price has dropped 8.8% since hitting $133.40 a tonne on March 15, which was the highest since June last year.
However, despite the recent moderation in the spot price, it's worth noting it's still 54% higher than the 2022 low of $79 a tonne, hit in October.
Since that low the price has been driven higher mainly by optimism over demand from China, which buys about 70% of global seaborne volumes of the steel raw material.
The rally accelerated after Beijing abandoned its strict zero-COVID policy towards the end of last year, as optimism mounted over an economic rebound amid stimulus spending and pent-up demand in the world's second-largest economy.
The iron ore price rally was matched by rising imports by China, with official data showing imports of 194.2 million tonnes in the first two months of the year, up 7.3% from the same period a year earlier.
It's likely that the pace of imports has been maintained in March, with Refinitiv estimating arrivals of around 103 million tonnes, while Kpler forecasts 102.7 million.
On a daily basis this equates to about 3.32 million tonnes in March, which would be an acceleration from 3.29 million in the first two months.
China publishes combined January and February data to smooth out distortions caused by the Lunar New Year holiday, which fell in January this year but was in February in 2022.
The question becomes what the risks are to the so far bullish start to 2023 for iron ore prices and volumes.
The chief one is that China's economic recovery focuses more on boosting consumer spending than it does on rebuilding the residential property sector.
China's economic growth target for 2023 is a relatively low 5%, and it's possible that this could be achieved largely through rising consumer spending, which would support increased demand for energy commodities such as crude oil as demand for transportation increased.
The struggling residential property sector has shown some signs of improvement in the first two months of the year, but most indicators are still in negative territory, so ultimately it's still a drag on steel demand.
The first two months of the year saw a 5.7% drop in property investment, although this was an improvement on the decline of 10% for 2022 as a whole. New housing starts declined 9.4%, still negative but better than the 39.4% slump in December.
Given that construction accounts for nearly a third of China's domestic steel demand, it would mean that the other sectors would have to pick up substantially.
Vehicle and goods manufacturing offer some hope, but they are also exposed to any sharp slowdown in the rest of the world, given China's status as the world's biggest exporter of manufactured products.
There has also been speculation that China will decide to implement a policy to cut steel output by 2.5% in 2023 from 2022's total of just over 1 billion tonnes.
If such a policy is adopted, it implies that any strength in the first half of 2023, as is currently being seen, will have to be offset by lower output in the second half.
China's domestic steel demand may decline to 910 million tonnes in 2023 from 920 million in 2022, Niki Wang, managing editor for iron ore at S&P Global Commodity Insights, told the Global Iron Ore and Steel Forecast Conference in Perth on Thursday.
While a 10 million tonne drop in China's consumption is relatively small, it still makes it harder to build an overall bullish case for iron ore demand and prices for 2023 as a whole.
The risk is that iron ore demand is being front-loaded into the first half of the year, and potentially will decline in the second, with the concomitant risk prices will also come under pressure.
The opinions expressed here are those of the author, a columnist for Reuters.
(Editing by Jan Harvey)