The ‘Weird’ Commodity Hurting the Bears as Prices Double

  • UBS’s Gordon says recent speculative rally has ‘surprised me’
  • Prices seen falling back to $60 in six months as supply gains

Are We Over the Worst for Commodities?

Iron ore’s probably heading for a retreat in 2017 as new mine supply comes online and a surplus builds, according to UBS Group AG, which acknowledged that the commodity’s recent surge was unexpected and had torpedoed an earlier forecast for a slump this quarter.
 
“It’s just surprised me,” Wayne Gordon, executive director for commodities and foreign exchange at the bank’s wealth-management unit, said in an interview in Singapore on Wednesday. In early October, Gordon told Bloomberg Television the final two months of the year may mark a “death knell” for the raw material as stockpiles climb. “Iron ore is weird because the inventories are very high in China and it’s got to be pure spec flows,” he said.

The raw material has doubled since bottoming 12 months ago on growing optimism that demand would remain steady in China and rising speculative interest. The advance, which has persisted even as China’s exchanges sought to curb investors’ enthusiasm, has wrong-footed analysts as well as miners. This week, Barry Fitzgerald, chief executive officer of Australia’s Roy Hill Holdings Pty, said every time he makes a price forecast, he gets it wrong.

“We’ve had a tough year in 2016,” said Gordon, who now sees the price back down at about $60 a metric ton in six months. “The market’s been balanced, if not in a slight deficit for iron ore, which is remarkable because we had that massive surplus the previous year. But next year, you’ll start to see that building up with a surplus again.”

Benchmark Rallies

Ore with 62 percent content delivered to Qingdao advanced to $79.73 a dry ton on Tuesday, near the level of $80.83 hit on Nov. 28, which was the highest price since October 2014, according to Metal Bulletin Ltd. It’s up 83 percent in 2016 and heading for the first annual increase in four years. Prices bottomed out at $38.30 in December 2015.

Iron ore futures in Dalian climbed 6.6 percent on Wednesday to close at the highest level since August 2014, presaging further gains in the benchmark price. Steel reinforcement bar in Shanghai also advanced to the best mark in more than two years after authorities in the biggest steel-making province launched a crackdown on illegal production.

UBS’s views on iron ore are in sync with Barclays Plc and Citigroup Inc., both of which said this week that prices are expected to fall again as supply expands and demand in China fails to grow. Citigroup sees prices dropping every quarter next year, from $60 in the first three months to $53 in the final period. Barclays put iron ore at $48 in the second half of 2017.

The inability of the bears to call iron ore prices right this year has been highlighted by Cliffs Natural Resources Inc. Chief Executive Officer Lourenco Goncalves. “Do you know what they’re going to say next? They’ll say it’ll be next year,” Goncalves said in September. “That’s the reason I don’t believe them. They don’t know anything.”

Australia and Brazil are the world’s largest iron ore shippers, and new projects are being ramped up in both countries, with Vale SA poised to start exports from its S11D venture and Fitzgerald’s mine in the Pilbara building up toward capacity. Australian Trade Minister Steven Ciobo told Bloomberg on Wednesday he doesn’t try to predict where prices are headed.

“Well, I’m not in the business of crystal-ball gazing on commodity prices,” Ciobo said in an interview in Jakarta. “They are what they are, and as the government, of course, we deal with that. Obviously if the price is better, that’s good for Australia.”

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