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Iron Ore's 18% Rally Bucks Bears' Forecasts as BHP, Rio Jump

  • Capital Economics's Bain warns the gains may prove temporary
  • Price has rallied as China mills ramp-up after New Year break

Iron ore isn’t sticking to the script, at least for the bears. The commodity that was supposed to be weighed down again this year by rising low-cost supply and poor demand has soared 18 percent, establishing a foothold above $50 a metric ton.

QuickTake Iron Ore Wars

The rebound, which means that iron ore has outperformed all the members in the Bloomberg Commodity Index in 2016, has probably been powered by restocking by Chinese mills and some weather-related disruption to shipments from Australia, according to Capital Economics Ltd. These supportive factors may prove temporary, it said.

Iron ore’s upswing has accompanied a revival in the price of other commodities including oil and industrial metals. Glencore Plc Chief Executive Officer Ivan Glasenberg said on Tuesday that raw materials have bottomed, and Australia & New Zealand Banking Group Ltd. said in a report on Thursday that commodity sentiment has turned in the last fortnight, citing gains in both crude and iron ore. Steel prices in China have also climbed.

Iron ore “prices will fall back, maybe before the end of the second quarter,” said Caroline Bain, a London-based commodities economist at Capital Economics. “Chinese steel production could fall quite sharply this year,” while Australian iron output will continue to rise, she said in an e-mail.

Iron ore’s gains this year were supported as a tropical cyclone in January disrupted some shipments from Australia’s Port Hedland, the world’s biggest bulk-export terminal, and as Chinese mills started to ramp up output after February’s Lunar New Year break. The recovery contrasts with three straight years of losses that were spurred by more low-cost supplies from the biggest miners including Vale SA in Brazil and BHP Billiton Ltd. and Rio Tinto Group in Australia, and weakening steel demand in China.

Ore with 62 percent content delivered to Qingdao fell 2.5 percent to $51.20 a dry ton on Thursday, according to Metal Bulletin Ltd. It reached $38.30 in December, the lowest in daily prices dating back to 2009. Prices surged 19 percent in February, the most since December 2012.

Rio said on Thursday the global expansion of seaborne iron supply was expected to outpace growth in demand in the near term. Chief Executive Officer Sam Walsh warned in the report that the year ahead is expected to be “particularly tough” for the industry.

Still, iron ore’s resurgence has been a boon for miners’ shares. BHP touched a three-month high in London on Thursday, with gains supported by a legal settlement related to a dam spill. Rio climbed 3.5 percent, while Fortescue Metals Group Ltd. surged 6.7 percent to close at the highest since October in Sydney. The trio are Australia’s largest exporters.

Chinese Demand

Steel demand in China, which accounts for half of global supply, is expected to shrink again this year, while stockpiles of iron ore at ports remain elevated even as prices have climbed. Steel consumption in Asia’s largest economy will contract by another 5 percent this year after a 5 percent drop in 2015, Moody’s Investors Service forecast this week.

Port holdings of ore in China rose 0.2 percent to 95.75 million tons last week to the highest level since May, according to Shanghai Steelhome Information Technology Co.  In the past year, inventories have expanded 13 percent.

“Short-term supply disruptions have been the main driver” of iron ore’s recent rise, National Australia Bank Ltd. said in a report received on Thursday, sticking with a forecast for prices to average $42 this year. “We don’t believe that this rally can be sustained due to the weakness in market fundamentals.”

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