Iron ore prices are sure to tank by 2016 end - Citi & Morgan Stanley
Beyond predictions, one thing is certain that iron ore has spent much of this year defying analyst's sustained slump forecast. Iron ore prices continued to push higher on Tuesday as the spot physical price for benchmark 62% fines rose by a further 0.85% to USD 61.75 a tonne. Chinese iron ore futures (January 2017 contract) at Dalian Commodities Exchange also pushed higher by 0.89% to CNY 455.5 suggesting that the gains in physical may extend further. While the price action recently is nothing short of bullish, Citibank's commodity research team believes that the so-called "hot commodity" of 2016 will cool significantly in the months ahead, predicting that prices will face strong headwinds towards the end of 2016 and most of 2017. Citi's base case for iron ore is for prices to average USD 55 in H2'16 before falling in 2017 to an average of USD 45.
Citi said “Iron ore market fundamentals have provided little support to this rally, as seaborne supply remained strong from low cost production, and inventories at Chinese ports built 11.5 million tonnes YTD while those at mills are generally stable. Instead, iron ore prices largely followed a rally of Chinese steel product prices, which was likely a result of strong property new starts and investment, robust growth of auto production, and temporary closure of mills due to key events and environmental regulations.”
Citi believes that the recent upward momentum in prices should persist over the next one to two months before reversing towards the end of the year. It said “We expect steel to remain in the driver’s seat of leading price movements in the ferrous metal space, unless seaborne supply faces large disruptions. Thus our bearish call on iron ore stems primarily from a bearish steel call. The underlying current Chinese steel price rally is itself unsustainable. Steel end-user demand, particularly long product demand, should tumble further in 4Q, as key economic indicators have seen growth peaking around 2Q with risks to the downside for the rest of the year. Continued government intervention should keep steel mill run rates range-bound for the rest of the year, but this may fail to support a further price rebound if demand tanks.”
It added “Iron ore prices still have to navigate through the ongoing rally, which may persist until early October thanks to the upcoming peak season in construction and this might allow prices to average USD 59 for Q3’16.”
Morgan Stanley recently issued an even more bearish outlook for iron ore and noted that iron ore prices have on average dropped in September, October and November over the past 10 years, and it also expects ore prices to become increasingly capped during H2 by ongoing supply growth. Morgan Stanley analysts predict that iron ore prices may tumble back to USD 40 during H2 as the approach of winter in China typically slows steel demand and output. The firm maintains its forecasts for iron ore to average USD 45 this quarter and USD 35 in Q4, with a base-case H2 estimate of USD 40.
Their view is backed by BHP Billiton, the world’s largest mining company and the No 3 iron ore producer, which has repeatedly said prices for the commodity will remain low for at least another ten years due to oversupply.
Prospects for increased supply include output from Australian billionaire Ms Gina Rinehart's Roy Hill project in the Pilbara, as well as expansions by top shipper Vale SA in Brazil, which is set to start up its SI ID project by the end of 2016.
Source: Strategic Research Institute