Iron Ore Soars After China's Pledges While Goldman Stays Bearish

  • Futures rally across Asia as Australian miners' shares advance
  • Goldman says iron has been led by steel, expects price to drop

Iron ore in Asia soared after Chinese policy makers signaled their willingness to buttress growth, with prices rallying even as the authorities reiterated pledges to cut excess industrial capacity, including in steel. Miners’ shares rocketed, with Australia’s Fortescue Metals Group Ltd. up 24 percent.

Futures surged to their daily limit of 407 yuan ($62.47) a metric ton on the Dalian Commodity Exchange, the highest in almost six months, while in Singapore, the SGX AsiaClear contract jumped as much as 19 percent to $58.95 a ton. In Sydney trading, Fortescue’s shares rallied while Rio Tinto Group and BHP Billiton Ltd. also climbed.

Iron ore has advanced in 2016, countering expectations it would see further losses on mounting low-cost supply from Australia and Brazil and weakening demand for steel in China, which accounts for about half of global output. At the annual National People’s Congress at the weekend, authorities said they’d allow a record high deficit and higher money-supply target to support growth of 6.5 percent to 7 percent. The nation will also subsidize cuts to excess capacity in industries such as steel.

“Reducing excess steel capacity would be a boost to steel prices, so market sentiment toward iron ore and raw materials has improved as well,” Wu Zhili, an analyst at Shenhua Futures Co. in Shenzhen, said by e-mail on Monday. Investors have grown more upbeat about prospects for China’s economy after policy makers signaled they’d take measures, he said.

Iron ore’s upswing this year has accompanied a revival in other commodities including oil and base metals such as copper. State efforts to cushion the loss of steel capacity in China, including helping retrenched staff, may help to improve the profit margins at mills that remain by reducing competition.

Recent gains in iron ore probably won’t last, Goldman Sachs Group Inc. said in a report received on Monday that forecast a drop back to $35 a ton in the final quarter. This year’s rally in iron ore has been driven by rising steel prices in China, a reversal of the normal relationship between the raw material and the manufactured product, Goldman said. 

“We expect the current rally to be short-lived,” analysts Christian Lelong and Amber Cai said in the note, predicting more growth in ore supply in the quarters ahead. “The causality will revert sooner rather than later, and steel raw materials will one again drive steel prices rather than the other way around.”

Supply Disruption

Advances in Asian iron ore markets typically presage gains in the benchmark Metal Bulletin Ltd. price for 62 percent content spot ore in Qingdao, which is updated once a weekday. That was at $53.75 a dry ton on Friday, the highest since Oct. 16. The price surged 19 percent in February after weather-related disruptions to supplies.

On Monday, steel in China also rose by the daily limit, with steel reinforcement bar for May up 5 percent to 2,073 yuan a ton on the Shanghai Futures Exchange, and hot-rolled coil climbing the same amount to 2,256 yuan a ton.

As much as 150 million tons of capacity will be shut under a five-year blueprint that’s part of supply-side reforms directed by President Xi Jinping. In the runup to the Congress, Moody’s Investors Service forecast steel demand in China would contract 5 percent this year after a 5 percent drop in 2015. Separately, BMI Research sees output down by about 50 million tons by 2020.

Steelmakers’ shares rose in China on Monday, with Baoshan Iron & Steel Co. up as much as 9.7 percent in Shanghai. Angang Steel Co. gained as much as 5.2 percent in Hong Kong, while Maanshan Iron & Steel rose 6.5 percent.

In Australia, Rio -- which said last week it expected the global supply of seaborne ore to outpace demand growth in the near term -- gained 3.5 percent to the highest since December. BHP Billiton Ltd., which has forecast the raw material will probably extend declines to find a level well below $50, was up 5 percent. Together with Fortescue, the three are Australia’s largest exporters.

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