Iron Ore Bear Holds Fast Even After `the Market Got It So Wrong'by
Itau Unibanco's Passos forecasts the rally will soon reverse
Supply set to respond, China speculation will fade, he says
Iron ore’s surprise rally may be a thing of the past in just three months. Rising supply will top demand once more and the sudden jump in speculative trading in China that’s helped support gains is set to fizzle out, according to Brazil’s Itau Unibanco Holding SA.
The commodity will probably soon be back below $50 a metric ton, and may end the year at about $42, Artur Manoel Passos, an economist in Sao Paulo at Latin America’s largest bank by market value, said in an interview. Last week, iron ore traded as high as $70.46.
“It’s understandable that the market got it so wrong, because the market by January was very pessimistic with China’s economic outlook,” said Passos, who’s covered commodities for half a decade. Adjustments “will be very fast, you will see prices going down about $10 in one week or two,” he said.
Iron ore’s gains in the opening months of 2016 wrong-footed many forecasters after China added stimulus, presiding over an unexpected rebound in the property sector. The turnaround then helped to ignite the surge in speculative trading in the nation’s commodity markets. While the speculation played a minor role, the main reason for iron’s jump was a disconnect between the spike in demand and an unprepared supply-side, said Passos.
“All this rally will fade as supply goes back in line, and we go back to a situation where we face oversupply, even if demand in China increases a bit,” Passos said by phone on Thursday. “I’m not overly concerned with this speculation. The fact of this speculation is it’s basically a short-term issue.”
Ore with 62 percent content delivered to Qingdao climbed 5.3 percent to $66.24 a dry ton on Friday, cutting this week’s loss to 0.1 percent, according to Metal Bulletin Ltd. Prices soared 14 percent last week, topping $70 for the first time since January 2015. Last year, it bottomed at $38.30.
Goldman Sachs Group Inc. has said the rally is unsustainable, forecasting a slump to $35 by year-end. Even miners see a drop, with BHP Billiton Ltd.’s Mike Henry, president of operations & minerals Australia, saying more low-cost supply is coming and Rio Tinto Group’s Sam Walsh predicting softer prices.
Not everyone sees another selloff. There’s room for ore to rise further as China’s steel rally will probably endure over the rest of the quarter, according to Credit Suisse Group AG. Should demand for infrastructure absorb rising steel output, prices may be supported over the year, the bank said this month.
More supply is on the way from the two largest shippers. Cargoes from Australia may rise 10 percent to 846 million tons this year, the country’s Department of Industry, Innovation & Science estimates. Brazilian exports will gain about 7 percent to 393 million tons, it said.
Miners’ shares have surged this month. In Sydney, BHP rose 23 percent, the most since 1999, while Rio rallied 21 percent and Fortescue Metals Group Ltd. rose 34 percent. Brazil’s Vale SA, which posted its first profit in three quarters on Thursday, has also advanced this month.
The “fundamentals for three months is that supply has the ability to adjust to this stronger demand, and will go back to the situation where there’s oversupply in the seaborne iron ore market,” said Passos. “Prices will go back to previous lows.”