Iron Ore’s Blockbuster Rally Under Threat as Warning Signs Flashby
Seaborne output expected to remain strong, Marex Spectron says
Holdings at China ports jump to record in final week last year
Iron ore has a very tough act to follow in 2017. After surging last year in a rally that caught out many investors, the commodity faces a challenge as supply concerns re-emerge, with Vale SA bringing on the industry’s biggest project and holdings at China’s ports at a record.
Seaborne supply is expected to remain strong on shipments from Vale’s newly completed S11D project in Brazil, and as miners look to take advantage of current prices, according to Tan Hui Heng, a Singapore-based analyst at Marex Spectron. That, coupled with slowing demand, may hurt iron ore, he said, joining banks including Morgan Stanley in expecting a retreat.
Iron ore soared 81 percent in 2016 in a year when low-cost supply had been expected to rise further amid tepid consumption, hurting prices. Instead, stimulus in China helped sustain steel output, and that, along with speculative interest and record coal prices, fueled the rally. Better demand and a more restrained approach by top miners Rio Tinto Group and Vale are likely to carry into this year, limiting losses, according to Clarksons Platou Securities Inc.
This year “will bring more supply than current pricing can handle, so pricing should see downward pressure from the current $80 a ton levels,” Jeremy Sussman, an analyst at Clarksons, said in an e-mail. “Nevertheless, we expect it to be a gradual decline rather than a crash that many are still calling for.”
Ore with 62 percent content in Qingdao ended the year at $78.87 a dry metric ton, just below a two-year high of $83.58 hit on Dec. 12, according to Metal Bulletin Ltd. The rally supercharged miners’ shares in 2016, with Rio 34 percent higher in Sydney and Vale more than doubling. Benchmark prices, which capped a record quarter in the three months to December even as supplies stacked up at China’s ports, fell 1.2 percent to $77.91 on Tuesday.
The holdings at ports in the largest buyer, one gauge of supply, surged 22 percent last year for the biggest annual gain since 2011. In the final week of 2016, they expanded 2.7 percent to 113.95 million tons, according to Shanghai Steelhome Information Technology Co. That’s the highest level on record.
“If history is any precedent, record stocks at Chinese ports carry an ominous sign,” Axiom Capital Management Inc. analyst Gordon Johnson and senior associate James Bardowski wrote in a Jan. 2 note. Axiom predicts prices will drop to $61 if inventories fall just half as much as in the last down cycle.
Prices should remain around $70 to $80 in the early part of 2017, with a gradual easing toward the $50-to-$60 range by mid-year, according to Gavin Wendt, founding director and senior resource analyst at MineLife Pty. The drop would come as supply better balances with demand, Wendt said in an e-mail.
The top four miners, which also include BHP Billiton Ltd. and Fortescue Metals Group Ltd., will probably boost supply 19 million tons next year, mostly from S11D, while a further jump is expected from mid-tier producers, Macquarie Group Ltd. said last month. Current supply is more than sufficient to meet demand, it said in a report.
The $14 billion S11D mine, with first shipments set for this month, will produce 90 million tons a year at full capacity. In the run-up to the opening, Vale executives have stressed the four-year period it’ll take to reach maximum output, and that the net gain to company production will be less than 90 million tons because of infrastructure constraints.
“The Brazilians are going to be very careful,” Philip Kirchlechner, director of Iron Ore Research Pty, said by phone. “They’ve always been very cautious, not expanding too crazily, but probably replacing some of their high-cost production.” Kirchlechner predicted volatile trading this year.
Even before S11D gets into its stride, exports from Brazil are running at a record pace. Total shipments in 2016 were about 374 million tons, topping the previous annual high of 366 million tons in 2015, according to Bloomberg calculations based on data from the Trade Ministry.
The strength of the economy in China will remain a critical factor after stimulus aided steel demand last year. Recent signals are mixed. While the country’s overall manufacturing gauge stabilized last month near a post-2012 high, the steel industry’s PMI dropped below 50 as output and orders fell.
Plenty of banks have forecast weakness in iron ore after 2016’s surprise surge. Morgan Stanley listed the commodity among its bottom three metals picks, and Citigroup Inc. views last year’s rally in bulk commodities as a fluke. Prices are expected to be back below $50 by the third quarter as China’s property market cools, according to Barclays Plc.