An­a­lysts say present iron ore prices are un­sus­tain­able

The Star Early Edition - - COMPANIES - Ran­jeetha Pakiam

IRON ore just won’t back down. Prices have ad­vanced to near the high­est level in more than two years as spec­u­la­tion of sus­tained Chi­nese de­mand for im­ports out­weighs re­peated warn­ings from an­a­lysts that the rally is overex­tended and will un­ravel.

“The lat­est price gains are not sus­tain­able,” said Caro­line Bain, chief com­modi­ties economist at Cap­i­tal Eco­nom­ics, de­scrib­ing the re­cent ad­vance as very spec­u­la­tive in na­ture. “It seems likely that it is premised on op­ti­mism about de­mand af­ter the New Year hol­i­day,” Bain said, re­fer­ring to the Lu­nar New Year which falls at the end of this week.

The raw ma­te­rial surged last year as stim­u­lus in China sup­ported steel pro­duc­tion, but­tress­ing record de­mand for im­ports as lo­cal mine out­put fell.

Ex­pla­na­tion

Cit­i­group has said part of the ex­pla­na­tion for re­cent strength may lie in a short­age of high­erqual­ity ore, which has been hard to come by, even as over­all seaborne sup­plies rise.

Among those sound­ing warn­ings about weaker prices dur­ing 2017 are the World Bank and Gold­man Sachs Group.

“New low-cost ca­pac­ity is ex­pected on­line this year, no­tably Vale’s new S11D pro­ject in Brazil,” the World Bank said in its quar­terly Com­mod­ity Mar­kets Out­look, re­leased on Tues­day. “These con­sid­er­a­tions, along with ris­ing scrap sup­ply and an ex­pected slow­down in China’s steel pro­duc­tion, are ex­pected to pres­sure prices down­ward.”

Ore with 62 per­cent con­tent in Qing­dao rose 1.9 per­cent to $82.69 (R1 109) a dry ton on Tues­day, ac­cord­ing to Metal Bul­letin. That’s near the peak of $83.65 hit on Jan­uary 16, which was the high­est price since Oc­to­ber 2014. Yes­ter­day, SGX Asi­aClear fu­tures traded 0.8 per­cent lower at $80.25 a ton in Sin­ga­pore. Brazil’s Vale is bring­ing on S11D this year, adding to seaborne sup­ply.

Yes­ter­day, BHP Bil­li­ton, the world’s big­gest min­ing com­pany, re­ported sec­ond-quar­ter pro­duc­tion rose 9 per­cent to 60 mil­lion tons in the three months ended De­cem­ber 31, up from 57 mil­lion a year ear­lier and top­ping the 59 mil­lion me­dian es­ti­mate of five an­a­lysts sur­veyed.

‘It seems likely that it is premised on op­ti­mism about de­mand af­ter the Lu­nar New Year’

Gold­man’s Jef­frey Cur­rie, head of com­modi­ties re­search, said on Tues­day that he’s neg­a­tive on the out­look for iron ore, even as prospects for most raw ma­te­ri­als are bullish.

“If we think about Brazil, Aus­tralia adding sup­ply to the mar­ket, it will likely put down­ward pres­sure on prices,” he said.

The bank’s bear­ish view is shared by Cit­i­group, as well as Bar­clays. While Cit­i­group has raised fore­casts for the first and sec­ond quar­ters to $77 and $70, it’s stick­ing with a fourth-quar­ter out­look for a drop to $53.

Bar­clays has said cur­rent lev­els aren’t sus­tain­able as growth in China may slow, while new seaborne sup­ply hits the mar­ket and de­mand for high-qual­ity ore eases.

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