Analysts say present iron ore prices are unsustainable
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.
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.