Iron Ore Will Plummet Into $40s, Says ‘Very Bearish’ Liberum
Iron ore will probably collapse below $50 a metric ton in the second half as global supply exceeds demand,
according to Liberum Capital Ltd., which highlighted prospects for additional output coupled with lackluster growth in
consumption and record port stockpiles in China. Prices will be back in the $40s as an extra 90 million tons
of seaborne ore will hit the market in 2017, analyst Richard Knights said in an interview. The increase comes at a time when
holdings at ports in China are already at an all-time high, while steel consumption in the top user could be flat, he said.
“There’s a perception that demand is better than it actually is,” Knights said by phone from London on Tuesday. “The
market -- despite that apparent pickup in demand in the fourth quarter -- is in significant oversupply, as evidenced by the
amount of iron ore inventory. And supply is not decelerating, it’s accelerating this year.”
Iron ore took many investors by surprise in 2016 by surging more than 80 percent as stimulus in China supported steel output
and consumption, even as low-cost mine supply expanded. Plenty of analysts have now flagged the potential for a selloff this
year, with Citigroup Inc. seeing a sharp correction and top forecaster RBC Capital Markets describing prices as unsustainable. With supply set to increase, Knights said that he’s “very bearish.”
‘Every Incentive’
“Particularly with prices where they are, there’s every incentive in the world to bring iron ore supply on,” said
Knights, adding that there’s scope for the port stockpiles to expand further, before they slump. “It’s just as simple as
supply exceeding demand, which obviously isn’t reflected in the price.”
Ore with 62 percent content in Qingdao rose 0.3 percent to $83.53 a dry ton on Wednesday, according to Metal Bulletin Ltd.
The commodity hit a two-year high of $83.65 on Jan. 16, and it’s up about 6 percent this year after rising in January to post a
fourth monthly gain. On Thursday, futures fell in Singapore and Dalian, signaling lower Metal Bulletin prices.
The resurgence has boosted miners, including Rio Tinto Group, which this week reported its first profit gain since 2013, BHP Billiton Ltd. and Fortescue Metals Group Ltd. Brazil’s Vale SA has seen its stock surge 25 percent this year as prices
gain and it jacks up output from the giant new S11D mine. The record bout of restocking in China has driven iron ore
prices to “irrational” levels that are soon to correct, Gordon Johnson, an analyst at Axiom Capital Management Inc., wrote in a
note received Wednesday. Looking at days of inventory at Chinese mills and stockpiles at ports, both have never been this high,
he said.
‘Forcefully Lower’
“Should steel capacity in China come offline as inventory is being destocked, we feel this would push iron ore prices
forcefully lower,” Johnson said. Axiom sees iron ore at $57 in 2017 and $45 next year.
Not everyone is bearish. Prices may average $73 this year, according to JPMorgan Chase & Co., which sees them at $71 in the
third quarter and $66 in the final three months. Last month, Singapore Exchange Ltd., which operates derivatives contracts
that help to set global prices, said a survey of industry participants showed most expected rates to hold firm or gain.
Inventories at China’s ports climbed to 123.5 million tons last week, according to Shanghai Steelhome Information
Technology Co. The stockpiles are at about 75 percent of the ports’ holding capacity and are still growing fairly quickly,
according to Knights. A further 20 million tons would bring them to about 90 percent of capacity, which could see a $20 to $30
drop in prices, he added.
“What will happen is the price will fall and also there will be an incentive for people to start drawing on those port
stocks,” Knights said. “I’d expect that traders who hold that inventory would just start cutting the price to try and get rid
of it, unless we’re bailed out by very, very strong demand in the first and second quarter, which is possible, but it’s not my
base case.”
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