Iron ore’s strong start to the second half and surge above $70 a metric ton will probably fade through the year-end as demand from top buyer China slows and global mine supplies remain robust, according to Sucden Financial Ltd. and Bank Julius Baer & Co.
“Any significant uptick in seaborne cargoes toward the tail-end of the year, and a fading demand outlook, will likely see iron ore prices trade lower as we view this recent rally as transitory,” Kash Kamal, an analyst at Sucden Financial, said in an email. Prices will average about $60 this half, he said.
The raw material’s revival, after sinking into the low $50s as recently as mid-June, has been driven by signs of stronger-than-expected demand in China, the world’s largest steelmaker. Output of the alloy by the country’s mills expanded to a record in June as steel prices rose, supporting producers’ profits as well as benefiting miners including Rio Tinto Group and BHP Billiton Ltd.
“The steel market should soften over the coming months, facing both cyclical and seasonal headwinds,” Bank Julius Baer said in a note this week. “The cyclical backdrop is unlikely to get better and the property market should start rolling over following months of tightening regulation.”
Spot ore with 62 percent content delivered to Qingdao — which reached $70.24 a dry ton on Wednesday, the highest since price April 11 — fell 3.1 percent to $68.05 on Thursday, according to Metal Bulletin Ltd. Prices have been volatile this year, hitting a peak in the $90s in February before slumping to mid-June. SGX AsiaClear futures lost as much as 3.1 percent to $66.50 on Thursday in Singapore.
Before iron ore rose back into the $70s this week, Goldman Sachs Group Inc. flagged its expectation for weaker prices. The commodity will drop as supply rises, the bank said in a note dated June 29, predicting an average of $47 next year. Australia’s government also sees sub-$50 iron ore in 2018.
For now, many industry signals from China remain strong. The spot price of reinforcement bar, a basic product used in construction, rose on Wednesday to the highest since 2012, according to Antaike Information Development Co. First-half iron ore imports gained 9.3 percent to 539 million tons.
Iron ore supplies are still expanding, especially from low-cost miners in Australia and Brazil. Earlier this week, BHP reported a rise in output in the three months to June, and forecast a gain of as much as 4 percent in the current financial year. On Thursday, Anglo American Plc reported that second-quarter ore production climbed 27 percent to 15.7 million tons. In China, port holdings remain near an all-time high.
While the resilience of China’s economy in general and construction activity in particular is providing support to iron and steel, demand should soften, according to Bank Julius Baer, which forecasts that iron ore will be back at $55 in three months and down to $50 in 12 months. “We see the iron ore market oversupplied and do not believe the recent rebound is sustainable,” it said.