Commodity markets from base metals to iron ore are tightening globally as Asia’s top economy presses on with supply-side reforms including plant closures, according to Citigroup Inc, which raised price forecasts and predicted steel will “go through the roof”.
“The market has been surprised by the Chinese government’s stringent execution of supply-side measures,” analysts including Tracy Xian Liao said in a report received last week. The bank boosted forecasts for copper, aluminium, nickel, zinc, iron and coal, both for the final quarter and 2018.
Metals have soared to multiyear highs in recent months while iron ore rebounded into a bull market as investors assess the reforms in China, where officials are closing illegal plants, tightening up on pollution curbs, and bolstering the economy before a key political meeting later this year.
The moves, which also include planned shutdowns over winter months, are crimping supplies while demand holds up, benefiting the remaining producers. Steel prices have already rallied to the highest level since 2011.
“The upcoming political transition in China may have incentivised local government officials to support growth with more aggressive fiscal spending and to closely comply with central government guidance on supply rationalisation,” the bank said.
With inspectors fanning out in key provinces, “a good portion of industrial producers with environmental issues may have decided to shut down their operations temporarily in order to avoid penalty.” Among the revisions, Citigroup sees iron averaging $65 a tonne in the fourth quarter, from $48, and $53 next year from $50, while copper is seen at $6,415 a tonne in 2018, from a previous call of $6,225.
The report didn’t give figures for how high steel may go, but did warn the surge will prove unsustainable.
The LME Index of six metals climbed to the highest since late 2014 last week, and is 18% higher this year after a 21% advance in 2016. Metals were mixed on the London Metal Exchange last week, with zinc trading steady along with lead, aluminium and tin, while copper and nickel fell.
Citigroup’s prediction of further gains in steel came after China’s leading producers’ group tried to ease concerns of a supply squeeze. Prices won’t continue to rise significantly but will fluctuate, and there won’t be a major shortage, the China Iron & Steel Association said on Tuesday.
Spot iron ore delivered to Qingdao has jumped for nine of the past 10 weeks in a sustained advance after bottoming at $53.36 a dry ton on June 13, according to Metal Bulletin. The commodity was at $79.65 last week, retreating from a four-month high.
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