Is iron ore’s rally over?

Iron ore’s reversals from its US$70 high are continuing, as the metal slipped close to US$51 per tonne.

Yesterday the Northern China benchmark iron ore price fell to US$54.20 per tonne, marking close to a week of continued decline, whilst it briefly traded as low as US$51.25 in Singapore.

These falls have seen iron ore slip nearly 20 per cent from its year to date peak, taking the major iron ore miners Rio Tinto, Fortescue Metals, and BHP share prices down with it.

The price rapidly gathered in strength over the first months of this year, defying analysts trends and leaving many unprepared for the return to higher prices.

The metal experienced an aggressive rally mid-March, recording the largest one day spike in years as the price for ore of 62 per cent grades jumped by nearly a fifth to just over US$63 per tonne.

It continued upwards to reach a 16 month high in mid-April, close to 70 per cent above the low watermark price of US$37 it rested at only late last year.

Yet despite this increase, analysts at the time still predicted a return to more moderate prices.

According to UBS analyst Daniel Morgan the iron ore price has historically spiked around this time of year.

He explained it grows after Chinese New Year due to stockpiling, and the rally itself caught the market by surprise.

“The magnitude surprised the market, it as a stronger rally than expected,” he said.

UBS reports dismissed the strong upwards movement as a flash in the pan, stating it was “based on macro hopes and short-covering with little evidence of fundamentally better demand – yet”.

It stated that the sharp rise and the now subsequent fall was based on the typical rise following Chinese New Year combined with a predicted growth in the country’s infrastructure and property markets, Morgan adding that the “property market accounts for 40 to 50 per cent of Chinese steel demand”, however the “latest data doesn’t show an infrastructure lift – yet”.

“The trade signals are not strong enough yet for a sustainable lift in demand,” Morgan said, “prices rallied in hope.”

Continued speculative trading in China which added to the metal’s upwards movement appeared to be baseless, as Chinese steel mills stockpiles did not recede enough to drive increased demand for iron ore.

UBS isn’t the only investment house that believes the high price point is unhealthy and unrealistic for the current state of the industry.

Even as iron ore rose, Goldman Sachs was predicting the metal’s reversal, stating its movements were “not sustainable”.

This was echoed by Citigroup, which believes optimism over China’s economic movements will be short lived.

Citigroup remains bearish on metal’s future and Chinese demand, while Axiom Capital Management dismissed the current rally as a ‘blip’.

“Higher prices are much harder to sustain in a supply-driven market since supply is primed to return with higher prices,” Goldman Sachs analysts wrote in the report.

“But this lesson will likely only be learned through false starts.”

Jeffrey Currie, Goldman Sachs’ head of commodities research, stated, “Demand hasn’t really changed, [so] it takes lower prices to push and keep supply below demand to create a deficit.”

UBS went on to state that iron ore’s rally will continue to fade unless there is a lift in demand – a lift which so far looks unlikely despite the major mines committing to cutting supply levels.

This lift also looks uncertain as China’s 13th five year plan signals additional mining consolidation, particularly in iron ore, and a returned reliance to imports, but one that is unlikely to grow in actual demand levels.

However, the rally has lifted forward estimates to a degree, with Goldman Sachs lifting its very bearish prediction for iron ore averages by 47 per cent, to US$55 per tonne, although it expects a continued slow downwards movement towards the end of the year, slipping in the third quarter to US$45 per tonne, and to US$40 per tonne in the last quarter of 2016.

 

 

 

 

 

 

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