As one might misquote Mark Twain, we have been here before.
In 2016, analysts were queued up to predict the iron ore price was going to collapse only for it continue its relentless rise. The recent pull back from $90 per metric ton has brought a fresh crop of dire predictions. Yet maybe, just maybe, there is more validity this time around for caution as to future price direction. There are a number of factors, each of which individually does not signal a price reversal but collectively suggests iron ore prices later this year could be lower than they have been in the first quarter.
Why Iron Ore Prices Might Really Fall
An article in the Australian Financial Review quotes analysts saying, the strength of recent pricing is encouraging Chinese domestic production to increase. In the first half in 2016 it was averaging a 220 million mt per year run rate, but rose to 280 mmt per year in the second half of the year. At the same time, global supply continues to rise with not just increased shipments from Australia but also number three miner VALE SA (NYSE:VALE) expanding supply from its $14 billion S11D mine.
The first shipment from S11D arrived in China early this month. Iron ore holdings at Chinese ports increased 8.2% in February, the biggest gain in three years and now stand at a record 130 mmt according to a Bloomberg report. Purchases of iron ore increased 13% to 83.5 mmt in February, an all-time high for that month, with year-to-date shipments up 13% to 175 mmt, the paper said.
Where’s All the Iron Ore Going?
On the plus side, increased shipments have not just been used to bloat existing port stocks, but also fueled robust steel production. Capacity closures have left the Chinese steel industry still bloated, but at least a lot leaner than it was a few years ago, Reuters says. Read this to mean that it will run faster when given the right pricing incentive to do so. That incentive has been an ongoing stimulus program aimed at infrastructure and construction.
China’s spending on infrastructure — including roads, airports, ports and railways — rose 17% last year helping support the country’s 6.7% expansion in GDP. Growth in infrastructure spending is forecast to continue, but will inevitably slow as a percentage a GDP over time.
Investors Have Seen This Before…
Nor have recent gains attracted the interest of speculators, as they did in the first half of last year. Net long positions and trading volumes on the Dalian exchange are muted compared to the speculative feeding frenzy in the first half of 2016. Chinese domestic investors are closely attuned to the activities and intentions of government policy, so their lack of appetite suggests they feel the bull run may have run its course.
Most telling maybe is that even producers are suggesting the price is going to fall back. Chief Financial Officer at BHP Billiton (LON:BLT), Peter Beaven, is quoted by Reuters is saying, “We’re seeing a moderation of the impacts of the stimulus which China was putting into its economy in 2016. We have got to be very cognizant that those fundamentals point to a softening, and our business and all the settings that surround it, have to be ready for a much lower iron ore price.”
JP Morgan Chase (NYSE:JPM) in Australia were more blunt about price prospects, being quoted by Bloomberg as saying “Iron ore is going to finish closer to $60 a (mt) by the end of this year.”
All this doesn’t necessarily signal the end of the current upward trend in iron ore prices, but it does suggest caution may be appropriate in assuming more of the same in the next quarter.