30-06-2017

Iron Ore Gets a Break—But This Hedge Fund Says It’s Going Lower

IronOre

Iron ore’s finally catching a break with a jump back into a bull market. But don’t bank on the recovery lasting through to the year-end, according to Academia Capital, a commodities and emerging markets-focused hedge fund, which warns that fundamentals will probably deteriorate.

“I expect iron ore prices to end the year lower, but that the market is vulnerable to a short-covering rally before we get there,” Ivan Szpakowski, chief investment officer at the fund, said in an email. “Iron ore supply and demand is likely to worsen in the second half.”

The raw material is closing out what’s been a bruising quarter on a very strong note, with spot prices climbing back into the $60s a metric ton and reaching the highest in eight weeks. The commodity remains well below a peak in the mid-$90s hit in February amid persistent concerns about rising global supply and prospects for softer demand in China. Academia highlights a potential weakening in consumption in the country’s property market.

“Steel demand from the real-estate sector is likely to weaken over the second half of 2017 and even more in 2018 as government tightening measures and slowing sales hit actual construction activity,” said Szpakowski, a former Asia head of commodity research at Citigroup Inc. Miners including Brazil’s Vale SA are ramping up output, and supply is “abundant,” according to Szpakowski.

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Ore with 62 percent content delivered to Qingdao has gained in 10 of the past 11 sessions and climbed 3.8 percent to $64.71 a dry ton on Thursday, according to Metal Bulletin Ltd. Prices have jumped more than 20 percent from the one-year low of $53.36 reached earlier this month, meeting the common bull-market definition. Despite the recent rise, spot prices have still lost 19.5 percent this quarter.

Aside from Academia, others are also bearish. Citigroup forecasts iron ore may slump into the low-$40s, with a nadir in six to eight months, as supplies swell and demand reaches a short-term peak. Independent economist Andy Xie has predicted prices may even sink into the $30s.
‘Bottom Line’

Clarksons Platou Securities Inc. isn’t so pessimistic, with a second-half outlook of $59 a ton. Prices have dropped from the highs in the first quarter, and that’s forced some miners to suspend output, especially in Asia, according to Jeremy Sussman, managing director for metals and mining. There’s also good demand as China restructures its mills, according to Sussman.

Rising production from Brazil and Australia “will be partially offset by lower supply from China and India,” Sussman said in an email. “The bottom line is we don’t see iron ore testing or falling below $50 a ton this year.”

Bears who predict lower prices in the long run are assuming the largest miners — Rio Tinto Group, BHP Billiton Ltd. and Vale — are “stupid, stupid and stupid,” Lourenco Goncalves, head of Cliffs Natural Resources Inc., told Bloomberg Television. Ultimately, the trio may step back from pumping ever-expanding supply onto the global market, according to Goncalves.

Futures also extended gains on Thursday, with the SGX AsiaClear contract rising as much as 4.2 percent. In Sydney, shares of Rio and BHP capped a sixth daily gain, while Fortescue Metals Group Ltd. was up for a fourth session.

Source: Bloomberg

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