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Iron ore the great big ugly duckling

‘Rising supply offsets improving Chinese demand.’

Iron ore faces renewed pressure and prices may sink back below $50 a metric ton before the year-end as rising supply offsets an improvement in Chinese demand, according to Clarksons Platou Securities Inc., which dubbed the raw material its least favorite commodity.

There’s been a pickup in exports this month after a weak performance in July, said Jeremy Sussman, an analyst at Clarksons Platou in New York. Even as steel output in the largest supplier is set to remain resilient this year, iron ore may sink into the high-$40s, he said in e-mailed comments. Benchmark spot prices compiled by Metal Bulletin Ltd. are at $59.31 a dry ton.

While iron ore’s 36 percent surge this year has surprised many analysts who’d expected a fourth year of losses, banks from Citigroup Inc. to Morgan Stanley are now predicting the likelihood of further weakness ahead. Australia’s Westpac Banking Corp. joined the chorus last week, forecasting that prices may sink below last year’s nadir of $38.30 as rising supply and faltering demand combine at a time when inventories at ports in China have risen rapidly.

Supply Profile

“We are optimistic on commodities in general into year-end due to better Chinese demand conditions amid years of under-investment,” Sussman said. “With that said, iron ore is our least favorite commodity due to its supply profile over the next 24 months.”

Metal Bulletin’s spot ore with 62 percent content delivered to Qingdao posted back-to-back quarterly gains in the first half, rose a further 6.7 percent last month and is little-changed in August. In contrast, futures on China’s Dalian Commodity Exchange have lost more than 9 percent this month, and on Tuesday closed at the lowest level in nine weeks.

Miners’ shares fell on Wednesday, reducing gains made this year as iron ore rallied. In Sydney, BHP Billiton Ltd. lost as much as 3.7 percent, paring its 2016 advance to 14 percent, as Rio Tinto Group and Fortescue Metals Group Ltd. both dropped as much as 3.6 percent.

China’s steelmakers, the largest buyers of seaborne iron ore, have sounded a note of caution. Hesteel Co. Ltd. said on Tuesday industry prospects aren’t optimistic, while Baoshan Iron & Steel Co. Ltd. said the supply-demand balance in China’s steel market hasn’t materially improved.

Vale’s Expansion

There are prospects for increased ore supply from Vale SA, which is expected to start output from its S11D project before the year-end, and from Australian billionaire Gina Rinehart’s Roy Hill, Morgan Stanley analyst Tom Price said by e-mail. He maintained a forecast for prices to sink to $40 this half.

Cargoes from Australia may increase to 874 million tons in 2017 from 818 million tons this year, the country’s Department of Industry, Innovation and Science estimates, while Brazilian exports will also expand. The duo are the world’s biggest shippers of iron ore.

“As a result of higher supply, we see iron ore dipping into the high $40s-a-ton range by year-end, which is higher than many of our competitors due to our demand outlook,” Sussman said. Iron ore is starting to come under pressure as exports are beginning to pick up, he said.

© 2016 Bloomberg L.P


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