11-03-2017

Iron Ore Rally Starts to Crack as Capital Economics Sees $45

IRO

Iron ore’s rally is showing signs of cracking. After a drumbeat of warnings that the gains won’t last, the commodity posted the biggest weekly slump in almost four months amid rising concern about the underlying strength of demand in China at a time of still-rising supplies.

The surge “was premised on optimism about demand,” Caroline Bain, chief commodities economist at Capital Economics Ltd., said in an email. “As such, we think the recent decline reflects some doubts about China’s demand.” Bain’s predicting a retreat to $45 a metric ton by year-end, 48 percent lower than Friday’s price, and levels last seen in February 2016.

Iron ore jumped in 2016 and extended gains this year as stimulus led to sustained demand from China’s mills, prompting record imports that helped swell port inventories to all-time highs. While the surge boosted miners Rio Tinto Group and Vale SA, it also triggered predictions of a pullback. Among those flagging potential weakness are banks including JPMorgan Chase & Co., the head of Australia’s central bank and even producer BHP Billiton Ltd.

“China’s economy will slow over the course of this year as the authorities try to rein in credit growth,” said Bain, who sees steel demand remaining stable at best. “There is the scope for prices to fall further. A combination of ongoing expansion in supply at a time of only subdued demand underpins our forecast.”

Ore with 62 percent content in Qingdao — which hit $94.86 a dry ton on Feb. 21, the highest since August 2014 — lost 5 percent this week to $86.72, according to Metal Bulletin Ltd. Futures in Singapore and Dalian have entered corrections, down more than 10 percent from recent highs. Miners’ shares have dropped, with BHP down 6.6 percent in Sydney this week, the most since May.

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Iron ore’s retreat has unfolded amid a broad retreat in commodities, with base metals and crude oil tumbling amid revived concerns of excess supplies. Raw materials have also dropped as the dollar strengthened on expectations that U.S. interest rates are poised to rise.

This week, BHP’s Peter Beaven said markets should brace for much lower iron ore as the impacts of stimulus in China slows down, and JPMorgan said prices will be closer to $60 at year-end. In February, Reserve Bank of Australia Governor Philip Lowe said commodities are going to come back off.

The are signs of robust supplies, including shipments from Vale’s new S11D mine. Imports by China in February were a record for the month, and stockpiles at ports in the top user held at around an unprecedented 130 million tons as of March 10, after expanding for the five months through February, according to Shanghai Steelhome E-Commerce Co.

“It is a bit of a chicken/egg situation,” Justin Smirk, a senior economist at Westpac Banking Corp., said in an email, referring to the potential impact from an unwinding of the holdings. “But without a lift in demand, once the decision is made not to continue to build inventories, then that excess supply will suppress prices and the fall in prices will spur an unwinding of inventories, which will lead to a deeper correction to prices.”

Smirk added: “We stand by our forecast for a significant correction in ore prices, we just can’t be sure of the timing.”

Source: Bloomberg

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