Iron ore may be about to get pulled back into the $50s. After being stuck in a very narrow range this quarter, prices may get dragged lower in the second half as global mine supply expands, steel prices ease off, and renewed production curbs at mills in China blunt overall demand.
Prices may drop to $60 a metric tonne in the next quarter and $55 in the fourth, according to Sun Feng, senior ferrous metals analyst at Orient Futures Co, who has more than a decade of experience tracking the market. CRU Group also sees a slight fall, with prices bottoming just below $60 in October or November.
“The outlook of iron ore prices is not rosy, particularly in the fourth quarter,” Sun wrote in an email that cited global oversupply.
The expected weakening of steel prices “will affect the market expectation of iron ore restocking by mills, therefore adding downward pressure upon iron prices.”
After years of gyrations, benchmark iron ore has been locked in a narrow range in the $60s for three months even as mills in China pushed out record volumes of steel, according to official data. The calm has come after Asia’s top economy prioritised an anti-pollution drive by restraining some mill supply in winter, benefiting higher-quality ore. At the same time, miners added output at new projects, although there’ve been supply glitches in Brazil and Canada.
“We are expecting prices to fall slightly from today’s level,” Erik Hedborg, an analyst at CRU Group, said in an email. “The reason is rising seaborne supply, especially from Brazil, together with a ramp-up at Roy Hill and resumption of IOC’s operations.” He added: “In addition, we are seeing high inventories at mills and ports again, so the restocking need will not be there.”
In Brazil, Vale SA has been bringing on its S11D project, although executives have vowed to act as a swing producer to calm prices should that be necessary if they spike. Australia’s Roy Hill, developed by billionaire Gina Rinehart, has been hitting maximum capacity, while in Canada, Rio Tinto Group’s Iron Ore Company of Canada was hit a by a strike.
Spot ore with 62% content delivered to north China was at $63.85 a tonne, according to Mysteel.com. Prices have lost ground this year, with most of the damage done in March, when they sank 18% to enter a bear market. Since then, the commodity’s gone sideways and volatility has ebbed.
Expectations for an easing in prices by year-end come amid signals China’s cooling off. A sharp deceleration in credit expansion may have weighed on the economy this month, according to Fielding Chen at Bloomberg Economics, who aggregates the earliest available indicators into one reading. Not everyone expects iron ore to drop. Jeremy Sussman, managing director at Clarksons Platou Securities Inc, said that a break below $60 a tonne is unlikely. Given the majors’ apparent “willingness to generally match supply with demand, we see prices generally range-bound,” Sussman said.
Citigroup Inc also expects more of the same. Prices will average $60 a tonne in the third quarter, $62 in the final three months, and then hold at an average of $60 in each quarter of 2019, according to forecasts listed in a June 25 note.
Rio Tinto Group expects worldwide supply to be flat in 2018 as global additions from mines will be largely offset by closures and disruptions, according to a presentation this month from Chris Salisbury, its iron ore head.
The company says while it’ll meet its goal of 360mn tonnes of capacity by the end of next year, that doesn’t mean it’ll be boosting cargoes.
In China, the largest buyer of iron ore cargoes, policy makers are expected to force mills to restrain output this winter during the so-called heating season, aiding demand for higher-quality inputs while reducing overall consumption. The China Iron & Steel Association has said the fresh round of curbs will be as harsh or even harsher than last year.
“During the heating season in the fourth quarter of 2018, mills will curtail the use of iron ores again for environmental reasons, so iron ore demand will be weakened significantly,” said Sun at Orient Futures. “Restocking to prepare for the wintry season is not sufficient to support iron ore prices.”
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