Iron ore rally prompts alert over softening

Iron ore’s rally to the highest level since 2014 has been so rapid even the industry’s champions are flagging the possibility of a pull-back.

As prices soar toward $100 a tonne, BHP Billiton says the market is likely to come under pressure, Fortescue Metals Group forecasts the raw material may moderate and Africa’s top supplier predicts a deep retracement. Macquarie Group warns of steep losses amid abundant supply and Goldman Sachs Group highlights bulging stockpiles.

“In the short term, we’re seeing stocks increase and prices increase at the same time, which is very unusual,” Fortescue CEO Nev Power said on Wednesday after the fourthlargest shipper reported firsthalf profit almost quadrupled. “We will see it moderate back to more sustainable, or should I say historic levels because it does seem to be just driven by a short-term market right now.”

Iron ore soared in 2016 as growth in China stabilised and steel production held up, boosting demand for cargoes from Brazil and Australia.

The rally has extended into 2017, given added impetus by rising steel prices and elevated demand for higher-grade ores.

While the advance has aided miners’ profits and shares, including BHP’s, it has also spurred forecasts for renewed losses as low-cost mine supplies rise and stockpiles in China swell to records.

The stockpiles are a downside risk, according to Goldman, although strong demand is supporting prices in the near term. “Inventory levels are likely to increase further and could potentially set new records,” the bank says.

“An eventual destocking phase would require domestic producers to scale output down as prices fall below the Chinese cost curve, and the outlook for the second half is relatively bearish,” it says.

Ore with 62% content in Qingdao was at $94.30 a tonne on Wednesday, after peaking on Tuesday at $94.86, the highest since 2014, according to Metal Bulletin. Prices have gained 21% in 2017 after jumping more than 80% in 2016 in a rally that shredded bearish forecasts.

While a driver of the surge has been expectations for sustained improvements in steel production and consumption in China, there is doubt from within the country that this is likely.

The nation’s steel demand will probably contract 1.8% in 2017, and go on falling through to 2030, according to the China Metallurgical Industry Planning & Research Institute.

The commodity will probably average $65 a tonne in 2017, Lv Zhenhua, an engineer at the institute, told an industry conference in Dalian on Wednesday. The state-linked body helps guide policy in the largest steel maker, which accounts for half of global supply and is the largest buyer of seaborne ore.

The World Steel Association is also cautious on the outlook in the country. Steel intensity is entering an era of decline, Frank Zhong, the group’s chief representative in Beijing, told the conference. Development goals in the 13th Five-Year Plan would not add much demand, while the slowdown in GDP growth will have a significant negative impact, Zhong said.

On Tuesday, as BHP reported a surge in first-half profit after commodities including iron ore recovered, the world’s largest miner also suggested iron ore might soften.

The market is “likely to come under pressure in the short term from moderating Chinese steel demand growth, high port inventories and incremental low-cost supply”, the company said.

Kumba Iron Ore CEO Themba Mkhwanazi offered perhaps the bluntest outlook from suppliers, warning in March the good times probably would not last.

“The recent past has shown us that when prices turn, they turn dramatically, and we are highly sensitive to that,” Mkhwanazi said.

He sees prices stabilising at $50- $60 a tonne in the medium term.

Fortescue’s Power says there is a positive outlook on the market given the strength of China’s demand.

Last week, Rio Tinto Group chief financial officer Chris Lynch said iron ore would defy forecasts for a collapse.

Still, record supply is stacking up at ports in China and new mines are coming on stream. Port holdings expanded 0.5% to 127.6-million tonnes last week, according to Shanghai SteelHome E-Commerce.

In Brazil, Vale is now bringing on output from S11D, its largest project.

“With inventory levels high for both steel and iron ore, it is only a matter of time … before confidence in demand meeting elevated expectations starts to wane, and mills go into a destocking cycle,” Macquarie Group has said.

With “supply in abundance, we’d therefore expect prices to fall sharply toward a more fundamentally supported $60a-tonne level”.

AN EVENTUAL DESTOCKING PHASE WOULD REQUIRE DOMESTIC PRODUCERS TO SCALE OUTPUT DOWN