Iron Ore Extends New Year Ascent as Slump Warnings Intensify

  • Capital Economics, World Bank skeptical the rally will endure
  • BHP Billiton reports 9% increase in fourth-quarter production

Iron ore just won’t back down. Prices are near the highest in more than two years as speculation of sustained Chinese demand for imports outweighs repeated warnings from analysts that the rally is overextended and will unravel.

“The latest price gains are not sustainable,” said Caroline Bain, chief commodities economist at Capital Economics Ltd., describing the recent advance as very speculative in nature. “It seems likely that it is premised on optimism about demand after the new year holiday,” she said in an e-mail, referring to the Lunar New Year which falls at the end of this week.

The raw material surged last year as stimulus in China supported steel production, buttressing record demand for imports as local mine output fell. Citigroup Inc. has said part of the explanation for recent strength may lie in a shortage of higher-quality ore, which has been hard to come by even as overall seaborne supplies rise. Among those sounding warnings about weaker prices over 2017 are the World Bank and Goldman Sachs Group Inc.

“New low-cost capacity is expected online this year, notably Vale’s new S11D project in Brazil,” the World Bank said in its quarterly Commodity Markets Outlook, which was released on Tuesday. “These considerations, along with rising scrap supply and an expected slowdown in China’s steel production, are expected to pressure prices downward.”

Two-Year High

Ore with 62 percent content in Qingdao was little changed at $82.49 a dry ton on Wednesday, according to Metal Bulletin Ltd. That’s near the peak of $83.65 hit on Jan. 16, which was the highest price since October 2014.

Iron ore’s rally, as well as advances in base metals, has benefited miners’ shares. In Australia, BHP Billiton Ltd., which reported quarterly output figures on Wednesday, rose 3.3 percent in Sydney to the highest close since 2015. Rio Tinto Group and Fortescue Metals Group Ltd. also advanced. Brazil’s Vale SA is up 39 percent in 2017.

Vale is bringing on S11D this year, adding to seaborne supply. In Australia, BHP, the world’s biggest mining company, reported second-quarter production rose 9 percent to 60 million tons in the three months ended Dec. 31, up from 57 million a year earlier and topping the 59 million median estimate of five analysts surveyed by Bloomberg.

Goldman’s Jeffrey Currie, head of commodities research, told Bloomberg TV on Tuesday that he’s negative on the outlook for iron ore even as prospects for most raw materials are bullish. “If we think about Brazil, Australia adding supply to the market, it’ll likely put downward pressure on prices,” he said.

The bank’s bearish view is shared by Citigroup, as well as Barclays Plc. While Citigroup has raised forecasts for the first and second quarters to $77 and $70, it’s sticking with a fourth-quarter outlook for a drop to $53. Barclays has said current levels aren’t sustainable as growth in China may slow, while new seaborne supply hits the market and demand for high-quality ore eases.

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