Iron Ore Faces Second-Half Drop as Frenzy Ebbs, Supply Gains

  • Prices to be determined by fundamental factors: Tata Steel
  • Supply increases to push prices much lower, Clarksons says

After last month’s speculative rally, iron ore is likely to extend declines because of rising supply from the major producers and faltering demand in China, the biggest buyer.

“Supply is likely to increase in the second half, so market conditions may ease further,” Rajiv Mukerji, group director of strategic procurement at Tata Steel Ltd., said in an e-mailed response to questions. He’ll be speaking at a conference in Singapore on Thursday that’s being attended by producers including BHP Billiton Ltd. and Vale SA.

QuickTake Iron Ore Wars

Iron ore has retreated from a 15-month high after widespread predictions the frenzy in China that propelled prices upward in April wouldn’t endure as regulators clamped down and the rallies induced higher production. Prices have peaked and will ultimately head into the high $30s-a-ton range by next year, according to Clarksons Platou Securities Inc.

Retail Frenzy

“The retail frenzy on Chinese exchanges pushed prices up to unsustainable levels, and we’ve seen prices pull back since tightening measures were introduced,” Jeremy Sussman, a Clarksons’ analyst at in New York, said in an e-mail interview. “Further supply increases in the second half are likely to push prices back to much lower levels.”

Ore with 62 percent content in Qingdao rose 1.8 percent to $56.78 a dry ton on Wednesday, according to Metal Bulletin Ltd. Prices peaked at more than $70 last month and are 30 percent higher this year. Futures in Dalian and Singapore fell on Thursday, with the SGX AsiaClear contract losing as much as 1.8 percent.

“Prices are gradually easing from the spike observed in the first quarter,” S. Iswaran, Singapore’s minister for trade and industry, told the conference. “Uncertainty is likely to persist in the near term as the market seeks to rebalance itself.”

Iron ore climbed in the first half as Chinese policy makers pledged to back economic growth, mills boosted output to take advantage of a rebound in steel prices and some ore supplies in Australia and Brazil were disrupted at the start of the year. Amid signs the Chinese leadership is moving away from further stimulus, iron ore prices are seen at $45 a ton in the fourth quarter, according to the median of 11 analyst estimates compiled by Bloomberg.

Goldman’s Warning

Goldman Sachs Group Inc. warned on April 22 that iron ore’s rally was unsustainable, and a tight steel market in China was a “temporary distraction” from fundamentals, and Fitch Ratings Ltd. said the surge in steel prices wouldn’t last. Not everyone is bearish. Credit Suisse Group AG said last month steel prices in China may be supported over the year if demand for infrastructure absorbs rising output.

“As the Chinese government has taken measures to reduce speculation in the iron ore derivatives market, the probability of a speculative frenzy in the second half has reduced,” Tata Steel’s Mukerji said. “The long-term prices are determined by the fundamental factors, such as demand-supply balance.”

There are signs that a glut is building with stockpiles of ore held at ports across China increasing to 99.85 million tons in the week to May 6, the highest since March 2015, according to Shanghai Steelhome Information Technology Co. The holdings were at 98.9 million tons last week.

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, while Brazilian exports will gain about 7 percent to 393 million tons. CRU Group forecasts 110 million tons of cumulative surplus in the next two years.

“If sentiment turns overly bearish on the first signs of weakening fundamentals, we may see exactly the same process in the second half, but in the other direction -- crash,” said Serafino Capoferri, senior consultant at CRU, who will also be speaking at the conference. “Oversupply will return.”

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