Posted on 18 Aug 2017
Iron ore in the US$70s a tonne may be as good as it gets for some time. After rallying hard in June and July, the commodity may see its gains unravel over the second half as steel production in China eases back from a record pace just as global miners pump up volumes.
The robust demand that’s supported gains may fade as steelmakers start to dial back output, according to Capital Economics Ltd, which came out first among forecasters in the second quarter, according to data compiled by Bloomberg.
Others expecting a drop include Citigroup Inc, Sucden Financial Ltd, Axiom Capital Management Inc and hedge fund Academia Capital.
“There was some fundamental support for iron ore’s rally, namely strong growth in China’s steel output,” Caroline Bain, chief commodities economist at Capital Economics, said by e-mail.
“Stocks at China’s ports are now stubbornly high and if, as seems likely, steel production and demand eases back later in the year, then we see iron ore prices coming under renewed pressure.”
Iron ore has surged on sustained demand from China, with mills benefiting from rising product prices and strong profit margins after the government shuttered some capacity.
Remaining producers are making record volumes, helping absorb rising supplies from Brazil and Australia and aiding miners including Rio Tinto Group and Vale SA.
Even those who aren’t deeply pessimistic on iron, such as Clarksons Platou Securities Inc, do expect some retracement.
“While we believe the market is far too bearish on iron ore, we don’t expect prices to stay here,” Jeremy Sussman, managing director for metals and mining, said in an e-mail, predicting a drop to about US$60 in the final quarter and holding at that level through 2018.
Among supportive factors are the supply reforms in China, as well as continued discipline from the so-called Big 4 – Rio and Vale, plus BHP Billiton Ltd and Fortescue Metals Group Ltd, he said.
Benchmark spot ore with 62% content delivered to Qingdao dropped to US$73.68 a dry tonne on Tuesday, declining for a third day, according to Metal Bulletin Ltd.
The raw material rebounded from a low near US$50 a tonne in mid-June to hit US$76.68 last week, the highest level since April. Yesterday, SGX AsiaClear futures in Singapore traded steady after a four-day drop.
Data this week from China showed signs of a slowdown. Industrial output, investment and consumption all slowed, and property – a key driver of steel demand – is also losing momentum.
Yao Wei, chief China economist at Societe Generale SA in Paris, said peak growth of the cycle “is behind us,” citing a slump in housing sales growth, a leading indicator.
For now steel production is holding at unprecedented levels, with output in July at 74 million tonnes, up 10% from a year ago. Still, output from the top supplier typically slows in the second half, dropping off toward November.
Then, there are supplies. Shipments from top producers are seen at 313.6 million tonnes in the third quarter, up 5% on-year, Sanford C. Bernstein Ltd said in a report this month.
