Iron ore rally runs out of steam amid fears of further weakness


The iron ore price rally that took off in the opening months of the year is running out of puff, with pre-Easter prices sinking to a three-week low.


Prices for the steelmaking raw material sank $US1.80 a tonne or 3.1 per cent to $US55.50 a tonne ahead of the Easter holiday, ­according to The Steel Index.

The price is now down by 12 per cent on the $US63.30 a tonne reached on March 8, a level that prompted suggestions that Scott Morrison would be able to think about reversing revenue writedowns based on the midyear budget update, which assumed $US39 (before freight) a tonne.

That might still be the case given that in the (calendar) year to date, iron ore has averaged $US47.50 a tonne (after freight). But most analysts expect the ­recent weakness to set in, and ­uncertainty prevails.

Barcelona-based FocusEconomics said the steep increase in spot prices from the mid-January low of $US39.30 a tonne to the ­recent peak of $US63.30 a tonne has caused concern among many analysts that prices have detached from fundamentals and have risen solely on speculation.

“It is not clear exactly what triggered the steep rally in prices, but China hinted at its National People’s Congress in early March that increased fiscal spending was planned in order to spur growth in the slowing economy,’’ Focus­Economics said.

“This announcement likely ­initiated the volatility. Since then, traders have picked up on the scent and rushed into the market. Trading volumes broke records during the first weekend in March as investors scrambled to get a piece of the action.’’

But it said the recent heightened volatility in prices was likely to be transitory, and has not altered long-term supply and demand ­dynamics.

Its global consensus survey found analysts expect prices to continue to fall to average $US46.70 a tonne in the fourth quarter of 2016, rising in 2017 to reach an average of $US52.70 a tonne in the fourth quarter.

The early March spike in ­prices to $US63.30 a tonne was ­attributed to rising steel prices, due in part to a rush by producers in the industrial city of Tangshan to maximise output ahead of an environmental crackdown ahead of a flower show.

The steel sector is one of the ­industries ordered to cut emissions by at least 50 per cent to clear the air for the Tangshan Horticultural Exposition which runs from April 29 to October 16.

Adrian Lunt, head of commodities research at the Singapore Exchange, said last week that Tangshan accounted for about 10 per cent of national steel output, driving uncertainty over the ­impact of the expo on Tangshan’s steelmakers.

But his survey of 100 industry participants found no clear consensus on the quantum or duration of any disruption caused by the crackdown.

“Some industry participants have downplayed the impact, highlighting that steelmakers may bring forward production ahead of the key events, or consumers may source from nearby steelmaking regions,’’ Mr Lunt said.

“Others have suggested it will have at least some impact on overall output levels, and may end up preceding permanent shuttering of some capacity in the region,’’ he said.

Source: The Australian

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