The price of what some would call the most vital spoke in the commodity wheel has gained nearly 50% this year so far, but on Tuesday analysts and strategists warned that the iron-ore rally could be fleeting.
According to the Platts IODEX, the metal’s price was at $62 per dry metric ton Tuesday, off about $2.20 from Monday, when prices soared by 20%.
Fueled in part by optimism after the National People’s Congress in China set growth targets over the weekend, iron ore sprinted past $60 a ton Monday, a level not seen since mid 2015 and the largest one-day percentage gain on record. The industrial metal offers a key ingredient used to make steel, which is found in everything from ships to infrastructure.
“The rally in iron ore prices was the result of a surge in steel prices needed to widen mill margins in order to incentivize operators to pay the restart costs and rebuild operating inventories of raw materials as China enters this year’s peak construction season,” explained Jeffrey Currie, Goldman Sachs’s global head of commodities, in a note dated March 7.
But he said that would provide only a temporary lift for iron ore, with steel supply ample and subsequent deterioration in steel margins expected to put prices under pressure again. In other words, investors are seeing a “brief lull before production cuts at high-cost mines are required to make room for low-cost producers,” said Currie.
Iron-ore prices above $60 are simply “not sustainable,” said Eugen Weinberg and other analysts at Commerzbank, in a note to clients on Wednesday. “We believe the pronounced and sudden price rise to be exaggerated given that there will be no change to the ample supply situation on the seaborne iron-ore market,” they said.
Iron ore is getting a tailwind from “recovering Chinese steel prices that have soared by around 34% versus their December low,” Commerzbank said. And that has encouraged and could continue to encourage Chinese steel manufacturers to produce more, though the country is also planning major cutbacks in the industry, Commerzbank said.
As for bountiful supply, Commerzbank pointed to Australia, where iron-ore exports are expected to increase by 13.2% this year versus 2015 to 868 million tons on the seaborne market, partly due to the commissioning of the Roy Hill mine in western Australia’s Pilbara region. The seaborne market can also be referred to as the spot-market trade for iron ore—for which China is the largest consumer of this raw material, according to Joseph Innace at Platts.
Brazil is likely to increase exports by 7.4% this year from last, to 392 million tons, said Commerzbank, citing a report published by Australia’s Bureau of Resources and Energy Economics. “In absolute terms, Australia and Brazil will thus be making 128 million tons more iron ore available to the seaborne iron-ore market in 2016 than in 2015,” said Weinberg and his team.
Adding to that is the prediction that China iron-ore imports will grow by a hardly insignificant 2.3% this year—21 million to 951 million tons even as the country is set to make cutbacks in the industry, the analysts said.
BHP Billiton PLC BHP, - 8.78% BLT, -8.51% whose shares are up 13% so far in March, is among the low-cost producers that plans to amp up its iron-ore production out of Australia this fiscal year, said Commerbank analysts.
And Vale VALE, -13.98% shares of which have surged 36% this month, and Rio Tinto RIO, -9.30% up 7.2%, RIO, -9.43% RIO, -2.83% continue to gain market share in the country. Stepping up supply on the back of low production costs “appears to be having the desired effect. This is because production costs in China are relatively high and ore grades are low,” said Commerzbank.
Commerzbank, said it expects iron-ore prices will end this year at $45 per ton, while Goldman has set a target of $35 per ton.
Source: Marketwatch