18-08-2016

Iron ore ripe for a fall in mature season

Ironore

The iron ore rally has appeared to reach saturation point as spot price fell back to the USD60/mt mark on Monday from a previous trading day spot price of USD60.20/mt.

As usual, the change is linked closely to the pull back of Shanghai rebar futures which dipped to a week-low, prompting the Dalian Commodities Exchange (DCE) to close at 424.5 on 15 August 2016. However, market optimism soon returned on Tuesday morning with more enquiries for futures trading on the DCE.

“Chinese onshore futures opened higher and then rose steadily throughout the morning to end the session just off the highs with DCE Jan in a 425.5–436.0 range and closed at 434.0, higher than last night’s closing at 424.5.” said a Singapore-based FIS broker.

Despite the good run in futures trading, USD-based investment bank, Morgan Stanley foresees a challenging season ahead in the September-October period.

“The season is mature now; the reliable September-to-October pullback is nigh,” said Joel Crane, analyst from Morgan Stanley.

According to Crane, the Sep-Oct period is normally considered a season of pullback where China’s demand for steel and production slows. His claim was supported by historical data where iron ore prices on average dipped in months of September, October and November over the past ten years.

The slowdown is due to the cold winter weather that hampers construction activity in China, thus lessening demand for steels and seaborne iron ore.

“Beyond the seasonal pullback, ore prices should also become increasingly capped in the second half by ongoing supply growth,” he added.

Morgan Stanley predicts that iron ore prices will plunge to USD40/mt in 2H16 from the current USD60/mt mark as supplies are expected to grow and China’s demand for steel slows during the winter season.

Meanwhile, China’s stimulus measures appear to be wearing off, as economic indicators show lower levels, coming in short of market expectations. For instance, the country’s Fixed Asset Investment (FAI) was 8.1% in July, lower than June’s rating of 9% and significantly below market forecast of 8.9%.

Similarly, China’s industrial production was up 6% in July, but lower than 6.2% growth recorded in June and below forecast of 6.1% growth. Retail sales in July hit 10.2%, below the market forecast of 10.5% and behind June’s retail sales of 10.6%.

Source: FIS

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