09-12-2016

After Smashing $80, Iron Ore’s Four-Quarter Rally Faces Test

iron

Iron ore’s fightback has propelled the commodity to the highest level in more than two years, with prices topping $80 a metric ton after a rally that’s spanned four straight quarters in the best run since 2010 and turbocharged miners’ shares.

“It’s driven by a combination of wider market exuberance for risk assets and Chinese stimulus,” said Kash Kamal, an analyst at Sucden Financial Ltd. “The rally does seem a little overdone though, with investor sentiment driving recent gains above $80 a ton.”

The raw material has more than doubled in the space of 12 months as Asia’s top economy boosted stimulus to ensure growth, spurring demand. The advance has been aided as investors embraced risk assets including industrial commodities after Donald Trump’s win fanned expectations for infrastructure spending and faster growth under his presidency. Still, while prices have been gaining, so too have some indicators of supply.

“For now it seems well supported toward $70 a ton on investor appetite alone,” Kamal said in an e-mail. “But with stocks at Chinese ports high, above 110 million tons and back toward 2014 levels, we could see some tempering of spot prices in early 2017 as we approach Chinese New Year.”

Ore with 62 percent content delivered to Qingdao advanced 3.2 percent to $82.25 a dry ton on Wednesday, the highest since October 2014, according to Metal Bulletin Ltd. It’s heading for the first annual gain in four years, with prices up 47 percent this quarter. Prices peaked in 2011 above $190.
Miners Rally

Shares of producers are benefiting. Rio Tinto Group climbed in Sydney to the highest since March 2015, while BHP Billiton Ltd. has rallied 46 percent this year. Fortescue Metals Group Ltd., which is 8.8 percent higher this week, said on Thursday it’s generating strong cash flow at current prices and it’ll continue to cut debt. In Brazil, Vale SA has surged.

Data from China on Thursday highlighted the robustness of import demand in the world’s top buyer. In the first 11 months of 2016, imports expanded 9.2 percent to 935 million tons, according to customs figures. November’s total of 92 million tons is the third-highest on record.

The latest leg of the rally has been supported by a crackdown in parts of China on illegal steel production, aiding product prices as well as iron ore. Rebar futures in Shanghai rose to the highest in more than two years on Wednesday after authorities in the biggest steel-making province began checks.

“The increase in iron ore prices has partly to do with speculative liquidity into the Chinese commodity futures markets; hopes are high for economic stimulus by governments in China, but also in the U.S.,” Casper Burgering, an economist at ABN Amro Bank NV in Amsterdam, said in an e-mail. While iron ore may ease off in the final weeks of this year, “going into 2017, I expect that spot prices could remain relatively strong,” he said.

Other banks have a less optimistic outlook even after the doubling of prices this year has upended bearish forecasts. UBS Group AG sees prices back at $60 in six months as a surplus starts to build up once again, echoing predictions from Barclays Plc and Citigroup Inc.

“The market’s been balanced, if not in a slight deficit for iron ore, which is remarkable because we had that massive surplus the previous year,” Wayne Gordon, executive director for commodities and foreign exchange at UBS’s wealth-management unit, said Wednesday. “But next year, you’ll start to see that building up with a surplus again.”

Source: Bloomberg

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