Iron Ore's Rally Stalls as Goldman to Citigroup Forecast Retreat

  • `The rally is there to be sold,' UBS's Wayne Gordon says
  • Iron's advance ``will likely prove temporary,' Goldman says

Iron ore’s rally stalled on Tuesday after a record 19 percent advance a day earlier as banks from Goldman Sachs Group Inc. to Citigroup Inc. together with some of the largest miners said that the surge wasn’t likely to endure.

Ore with 62 percent content delivered to Qingdao dropped 0.2 percent to $63.63 a dry metric ton, Metal Bulletin Ltd. data showed. The decline was preceded in Asia by a fall in bellwether futures in Singapore, which lost as much as 12 percent.

For Goldman, iron ore’s rally “will likely prove temporary,” the bank said in a note that maintained an end-of-year target of $35 a ton, while Citigroup said it’s still bearish and Axiom Capital Management Inc. said the jump was probably just a blip. BHP Billiton Ltd. added to the chorus, saying the advance didn’t change its mid- to long-term outlook.

Iron ore has rallied in 2016, surprising forecasters who’d expected further losses for a commodity facing a global glut and sinking demand for steel in China. Monday’s move was in large part a response to weekend comments from the Chinese government that implied more infrastructure investment, BHP Minerals Australia President of Operations Mike Henry told reporters on Tuesday. UBS Group AG and Australia & Zealand Banking Group Ltd. both said the advance may have been aided by investors reversing bets on losses.

‘Extreme’ Event

“There’s clearly what you would describe as an extreme short-covering event going on,” said Wayne Gordon, executive director for commodities and forex at UBS Wealth Management. “The rally is there to be sold because the fundamentals of the market, being supply and demand, do not stack up.”

Australia’s Roy Hill holdings Pty, the venture backed by billionaire Gina Rinehart that’s ramping up output from a new mine in the ore-rich Pilbara to produce 55 million tons a year, was also cautious. While the spike was an unexpected but welcome surprise, “the consensus, if you look at the forward estimates is down, $30s, $40s,” Chief Executive Officer Barry Fitzgerald told reporters. “We expect it to be somewhere there.”

Annual Losses

Iron ore posted a third year of losses in 2015 as global supply topped demand, with the biggest miners boosting low-cost output even as steel consumption in a slowing Chinese economy started to shrink for the first time in a generation. Data on Tuesday showed China’s imports of ore in February dropped to the lowest level since May.

“The issue is that China is exposed to a global economy, whose growth is mediocre at best, and driving domestic demand is becoming more difficult than ever,” said Jessica Fung, an analyst at BMO Capital Markets in Toronto. “I am concerned that this is setting China up for a harder landing down the road, which in turn means a very strong reversal for iron ore.”

Rio Tinto Group, the world’s second-biggest iron-ore exporter, declined 4.1 percent by 10:48 a.m. in London on Tuesday, and BHP lost 4.5 percent. Fortescue Metals Group Ltd., which announced a tie-up with Brazil’s Vale SA, fell 9.4 percent in Sydney trading, following a 24 percent surge on Monday.

Producers probably don’t “believe that this price level is going to be sustainable,” Ole Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen, said in an interview in Melbourne. “The question on China is if can they deliver. I’m still a little bit hesitant about that.”

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