Morgan Stanley analysts are trepidatious about recent stability in iron ore prices and suggest they may head back south before year end.
“Now at US$56/t cfr North China, it’s down a bit from Q2’s $60/t-high, but still surprisingly buoyant,” Morgan Stanley analysts write.
The surprise in this comes on numerous fronts. First, the analysts note we are now past the the strong season for iron ore in China. Building picks up mid-year, adding demand for steel, but falls off later in the year as construction slows down over winter.
Notably, iron ore prices have slacked off in recent weeks, suggesting the winter slowdown may be unfolding. Yet Morgan Stanley wonders if the pull back so far is enough given abundant signs the steel and iron ore market continues to adjust to slower growth and a deluge of cheap new Australian iron ore supply.
Morgan Stanley notes that steel production is down in China in recent months, down three percent year-over-year in August. Further: “China’s steel mills are operating at a loss as domestic rebar prices have fallen to $344/t – below the cost of steel production,” the analysts say.
Meantime, Chinese imports of iron ore continue to decline. In August they were down 14%, while exports from Australia hit record highs.
And on the supply front, it’s clear that major producers ex-China are not keen to rein in output. Morgan Stanley rounds up the numbers, noting, “Fortescue Metals has reached its target of 155Mtpa; there’s more new supply coming from Rio Tinto (315Mtpa in 2015, going to 360Mtpa); BHP Billiton (260Mtpa in 2015, to +270Mtpa); Vale (344Mtpa in 2015, to +400Mtpa); and Roy Hill starts exports this month.”
Amidst the surging supply, Morgan Stanley points out that port inventories are building. It pegged them at 81 million tonnes end of September, up by 6 million tonnes from August.
Likewise, prices of other steel-making ingredients are sharply down, and iron ore derivatives at the moment serve as a bearish signal for the iron ore trade, Morgan Stanley says. So more pricing pain is in the cards, the analysts conclude.
“Seaborne iron ore’s stable prices are at odds with China’s weak steel production rate, Australia’s relentless supply growth rate, adequate ore inventories in the trade’s supply chain, steel’s other collapsing raw material prices, as well as weak derivatives for ore and steel trades. Risk for ore prices remains to the downside for October, in our view. By Nov-Dec, pre-winter restocking mitigates this risk.”