Iron Ore’s Pivot From Boom to Gloom Shows Risk of Drop Below $50

Updated on
  • Prices will probably extend declines, according to Maike’s Ren
  • Citigroup says it’s still bearish on outlook amid oversupply

Iron ore has pivoted from boom to gloom in a few short weeks. Benchmark prices are near $50 a metric ton as spectacular losses this month driven by rising supplies and a more cautious approach from mills in China have eviscerated April’s speculation-driven rally.

“Seaborne supply is rising while the Chinese steel mills will reduce purchases,” Ren Jiaojiao, an analyst at Maike Futures Co., said by phone from Xi’an on Tuesday before the price data. Inventories at China’s ports -- which topped 100 million tons last week -- may increase further, according to Ren.

The raw material has been on a tumultuous ride this year after tentative signs of a demand revival in China, including widening profit margins for steelmakers in the top producer, ignited a firestorm of speculation. The frenzy led to a clampdown from regulators and exchanges, weakening prices once more, including iron ore and steel. Brazil’s Vale SA, the largest iron ore producer, warned last week there was a need to prepare for tougher times.

“The run-up in April was fueled partly by purchases from steel mills ramping up production to capture the exceptionally-high profit margin,” said Ren. But that margin is now “quickly contracting, so mills are adjusting to the new situation by depleting their raw material inventories first. They will also adopt a hand-to-mouth strategy in purchases later because of anticipation of higher supply at the ports.”

Ore with 62 percent content rose 0.3 percent to $51.36 a dry metric ton on Tuesday, according to Metal Bulletin Ltd. After surging 23 percent last month as China’s ill-fated frenzy gathered pace, the price has tumbled by 22 percent so far in May. Earlier, futures in Dalian dropped 0.9 percent, while the SGX AsiaClear contract rose.

The port inventories in China increased 1.6 percent to 100.45 million tons last week, the highest level since March 2015, according to data from Shanghai Steelhome Information Technology Co. They’re up 7.9 percent this year after China’s steel mills increased daily production to a record last month.

Citigroup Inc. said in a report on Tuesday it remained bearish on iron ore, forecasting persistent oversupply on rising output from the top miners as well as Gina Rinehart’s Roy Hill project. At the same time, weaker steel prices will encourage mills to restrain output and keep ore holdings low, it said.

“Oversupply should extend into the rest of 2016,” Citigroup said, predicting that prices will average $47 a ton this year. “Weaker steel prices should incentivize mills to decrease utilization rates and maintain low iron ore inventories, putting pressures on Chinese iron ore imports.”

— With assistance by Feiwen Rong, and Ranjeetha Pakiam

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