Iron Ore's Rally Toward $100 Triggers Alarm as Gains at Risk

  • China Planning Institute sees average price of $65 this year
  • World Steel Association says China’s steel intensity dropping

Iron ore may be headed for trouble. After trashing legions of bearish forecasts with a rally that’s taken benchmark prices back toward $100 a metric ton, the commodity hasn’t swayed all the skeptics and even some miners are flagging concerns that recent gains are probably overdone.

The commodity will probably average $65 a ton this year, according to the China Metallurgical Industry Planning & Research Institute, a state-linked body that helps to guide policy in the world’s largest steelmaker. BHP Billiton Ltd. has said the market is likely to come under pressure, while Macquarie Group Ltd. is warning there’s a risk of steep losses amid abundant supply.

Iron ore soared in 2016 as growth in China stabilized and steel production held up, boosting demand for cargoes from Brazil and Australia. The rally has extended into this year, given added impetus by rising steel prices and elevated demand for higher-grade ores. While the advance has supercharged miners’ profits and share prices, it’s also spurred forecasts for renewed losses as mine supplies rise and stockpiles in China stand at records.

“With inventory levels high for both steel and iron ore, it is only a matter of time in our view before confidence in demand meeting elevated expectations starts to wane, and mills go into a destocking cycle for iron ore,” Macquarie analysts including Ian Roper said in a note dated Feb. 20. With “supply in abundance, we’d therefore expect prices to fall sharply toward a more fundamentally supported $60 a ton level,” they said.

Long Way Down

That’s a long way down from current levels. Ore with 62 percent content in Qingdao rose 2.7 percent to $94.86 a dry ton on Tuesday, the highest since August 2014, according to Metal Bulletin Ltd. Prices have gained 20 percent this year after jumping more than 80 percent in 2016. Futures in Asia fell on Wednesday, with the contract in Singapore down 1 percent.

While a driver of the surge has been investors’ expectations for sustained improvements in steel production and consumption in China, there’s doubt from within the country that’s likely. Steel demand in China will probably contract 1.8 percent this year, and go on falling right through to 2030, the Planning & Research Institute’s Lv Zhenhua told a conference in Dalian on Wednesday.

The World Steel Association is also cautious on the outlook in the country that accounts for half of global supply. Steel intensity is entering an era of decline, Frank Zhong, the group’s chief representative in Beijing, told the conference. Development goals in 13th Five-Year Plan won’t add much demand, while the slowdown in GDP growth will have a significant negative impact, he said.

“Demand in the first and second quarter could be okay because of ongoing infrastructure investment, but beyond that it’s difficult to say,” Zhong said. “Demand last year was high, so it would have to rise from a very high base. We still expect demand to decline this year as a whole, maybe 2 percent.”

‘Under Pressure’

While BHP reported a surge in first-half profit on Tuesday after commodities including iron ore recovered, the world’s largest miner also suggested iron ore might soften. The market is “likely to come under pressure in the short term from moderating Chinese steel demand growth, high port inventories and incremental low-cost supply,” the company said.

There are signs of plentiful supply at ports, as well as new mines coming on stream. Port holdings expanded 0.5 percent to 127.6 million tons last week, rising for the eighth straight week, according to Shanghai SteelHome E-Commerce Co. They’re up about 48 million tons since June 2015. In Brazil, Vale SA is now bringing on output from S11D, it’s largest project.

Rising stockpiles are a downside risk, according to Goldman Sachs Group Inc., although strong demand is supporting prices near term. “Inventory levels are likely to increase further and could potentially set new records,” the bank said in a report received on Wednesday. “An eventual destocking phase would require domestic producers to scale output down as prices fall below the Chinese cost curve, and the outlook for the second half is relatively bearish.”

Fortescue Metals Group Ltd., the fourth-biggest exporter, reported first-half profit almost quadrupled on Wednesday, saying China’s policies and infrastructure projects are supporting steel demand and iron ore prices. Still, the company that’s been a cheerleader for the industry, combined a statement of faith in the outlook with a suggestion the run-up may be overdone.

“In the short term, we’re seeing stocks increase and prices increase at the same time, which is very unusual,” Chief Executive Officer Nev Power said on a conference call. He added: “We will see it moderate back to more sustainable -- or should I say -- historic levels because it does seem to be just driven by a short term market right now.”

— With assistance by Martin Ritchie, and Ranjeetha Pakiam

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