Citigroup Raises Iron Ore Outlook as Demand ‘May Surprise’

  • Government stimulus may boost demand in top user, Citi says
  • Bank raises price forecast for final three months by 21%

China’s efforts to prop up its economy and escalating mining costs may delay iron ore’s inevitable decline back below $40, according to Citigroup Inc., which raised its price forecasts by as much as 21 percent.

The bank predicts that the raw material used to make steel will trade at $48 a metric ton in the third quarter and $46 in the final three months, compared with previous estimates of $46 and $38, Citigroup said in a report Tuesday. It will average $49 this year and $42 the year after, before sinking to $38 in 2018 and 2019, it said.

Iron ore has retreated 27 percent since touching a 15-month high in April after regulatory authorities and exchanges in China teamed up to quell a record spike in speculation in commodities. There’s a high probability that the country will maintain short-term stimulus that will boost demand for steel, Citigroup said. While stimulus policies support demand in the near term, they’ll delay the removal of excess steel capacity, according to the bank, which said it remained bearish in the medium-term.

“China demand may surprise to the upside,” Citigroup analysts including Tracy Liao said. “We remain bearish on medium-term iron ore prices, and expect the seaborne market to spend a longer time finding lows.”

Ore with 62 percent content rose 2.1 percent to $51.11 a dry ton on Monday after surging 3.9 percent on Friday, according to Metal Bulletin Ltd. While prices are up 17 percent this year, they’re still well shy of April’s high of $70.46. So far this year, they average $52. Citigroup maintained its long-term forecast of $55 a ton.

Speculative Funds

The explosion in Chinese ferrous futures trading has probably come to an end as speculative funds may have flowed out of the commodities sector and returned to stock and bond markets, according to Citigroup. Uncertainties in iron ore demand persist as the steel sector benefits from China’s pursuit of short-term growth through monetary easing and fiscal expansion, the analysts said.

Iron ore may find some support from a potential increase in miners’ costs. The “massive” cost deflation in the past two years, helped by lower oil prices and freight rates, as well as a depreciation in producers’ currencies, may have come to an end, the bank said.

Expansion of low-cost supply is still rolling out as planned, Citigroup said. The top producers including Vale SA in Brazil, as well as Rio Tinto Group and Gina Rinehart’s new Roy Hill mine in Australia, may add about 60 million tons of capacity this year and 50 million tons in 2017, the bank estimates. These projects will likely go forward regardless of prices, Citigroup said.

Vale’s 90 million-ton-a-year S11D project should start from the fourth quarter, while rival BHP Billiton Ltd. will achieve 290 million tons of annual capacity by 2018, Citigroup said. Roy Hill is on track to ramp up annual capacity to 55 million tons by the end of 2018, and will add 17 million tons of additional supply this year and next, Citigroup forecasts.

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