01-07-2016

Iron ore seen boxed below $50 in H2 as glut persists

Ironore

After an unexpected rally in the first months of 2016, iron ore should fall back below $50 a ton in the second half of the year as more of the bulk commodity hits an oversupplied market, a Reuters poll showed.

But prices should still be up on the year, analysts say, thanks to an early-year rally in Chinese steel futures that spread to iron ore and helped the raw material recover from a three-year slide.

Iron ore emerged largely unscathed from the selloff that hit financial markets last week after Britain voted to exit the European Union.

Benchmark 62-percent grade iron ore for delivery to top market China will average $47 a ton in July-December, according to the median estimate of 18 analysts polled by Reuters.

That will put the 2016 average at $49 a ton, up from $47 in a December poll. For 2017, iron ore is forecast to average $46, up from $45 in the previous poll.

While iron ore has recovered from a seven-year low of $37 in December, trading at $53.40 on Wednesday, worries over a glut have kept any bullish drive in check.

“The global iron ore market is in structural oversupply in our view,” said Carsten Menke, an analyst at Bank Julius Baer in Zurich.

Menke sees a surplus of almost 40 million tonnes of iron ore this year, growing to 70 million tonnes next year.

Australian billionaire Gina Rinehart’s Roy Hill mine and top iron ore producer Vale SA’s S11D expansion project in Brazil’s Amazon are expected to add to supply this year.

Similarly, China’s domestic mines are showing more resilience to low prices with output rising in May for the first time in two years, Goldman Sachs said this month.

“We do not think this growth is sustainable as most producers are once again operating at a loss, but this modest increase in domestic output will compete with imported ore and is likely to add pressure on seaborne prices in the second half of 2016,” the bank said.

As iron ore supply rises, China’s steel demand will remain subdued for the rest of this year and next with Beijing not in a position to stimulate consumption and steel exports likely to be curbed by anger from trading partners, said Niraj Shah of steelanalyst.com.

“At the same time, the (Chinese) government will be forced to shut down economically unviable capacities and restructure assets,” said Shah.

Source: Reuters

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