Citi has eased its bearish projections for iron ore prices for the second time in two months, raising its near-term forecasts on robust steel output in China.
The prospect of steady demand led Citi analysts to lift their average price expectation for this year from $US47 a tonne to $US49 a tonne, as well as its 2017 projection from $US39 to $US42.
The move follows a similar revision in April, with its 2017 forecast now $US7 a tonne higher than where it stood just two months ago.
“We maintain a bearish view on iron ore, but see some short-term upside thanks to better-than-expected Chinese steel output,” Citi said in a note today.
Iron ore prices have endured a rollercoaster year so far, spiking 50 per cent from January lows to an April high near $US70, before sliding close to 25 per cent in May.
The run-up was aided by a number of factors, including hopes for Chinese stimulus and steel output gains.
However, the gains were seen to have been exacerbated by a tidal wave of speculation, while the losses have been intensive due to signs of “panic selling”, according to Citi.
The bank’s analysts believe volatility will continue through the short-term, but the extent of speculative trading may ease.
“In our view, the explosion in ferrous futures trading volumes has likely come to an end, as speculative funds may have flowed out of the commodities sector and returned to stock and bond markets,” the Citi note read.
The bank’s analysts have been among the most pessimistic in the market, having earlier this year warned prices had the potential to slide below $US30 a tonne.
They have been caught off guard by the rise in Chinese steel output, but remain adamant the tailwind will not last long, with forecasts in the medium-term remaining depressed.
“The Chinese government’s mini-stimulus plans to support short-term growth and stability could by no means resolve structural oversupply in the steel and iron ore market, primarily because China still faces a transition from an investment-led to a consumption-led economy,” Citi said.
“Any stimulus may actually delay this transition, and thereby delay the process for the iron ore market to find balance again.”
Citi kept its 2018 forecast untouched at $US38 a tonne, while trimming its 2019 outlook by $US2 to $US38. The bank also introduced a forecast for 2020 for the first time, with a modest recovery to $US40 a tonne seen likely at the present time.
“Citi maintains a bearish view on iron ore and recognises that a structural decline of Chinese steel production and a strong seaborne supply pipeline should point the market towards oversupply,” the note said.
“Therefore prices must stay lower for longer to incentivise curtailments by high-cost producers and to rebalance the market.”
In the long-term, prices are expected to settle around $US55 a tonne.
Source: theaustralian.com.au