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Iron ore’s party gives way to hangover as China stockpiles surge

Prices have given up gains as dollar advances on rate outlook.

For iron ore, it is the morning after the night before. Prices have given up most of the gains inspired by Donald Trump’s surprise win and a speculative frenzy in China, with a surge in port stockpiles in the top user reminding investors that fundamentals still count.

“The speed of the recent rally leaves it open to the charge that price action has been too much, too fast,” Dane Davis, an analyst at Barclays Plc in New York, said in a note that asked “After the party….the hangover?” The balance of risk for iron as well as copper is skewed to the downside as the dollar strengthens and the effects of Trump’s win wear off, according to Davis.

 

rising-iron-ore-stockpiles

 

Iron ore barreled to a two-year high this month as investors celebrated Trump’s victory on the outlook for infrastructure spending at the same time commodities futures volumes surged in China. The rally has reversed after mainland exchanges raised charges to quell the fervor, and the US currency rose on prospects for higher interest rates. The port data have added to the bearish mix, reinforcing signs of ample supply, and come as mining giant Rio Tinto Group cut jobs across West Australia, citing a challenging outlook.

“As it did earlier this year, China has cracked down on speculation in the iron ore market,” Davis said. “With these stricter standards in place, the iron ore price should continue to ease off recent highs, though it may find support from continued highs in other steel raw materials, such as met coal, and a domestic steel market that looks to set to grow production in 2016.”

Trump’s Win

In Asia, the SGX AsiaClear contract fell 0.9% to $66.20 a ton at 3:34pm in Singapore. That follows a 15% drop last week, and puts prices little above the $64.78 close on November 8, the last day of trade of before Trump’s win. On the Dalian Commodity Exchange, futures were at 552.5 yuan ($80) a ton, compared with the 519 yuan close on November 8, and the November 14 high of 627 yuan.

Benchmark spot with 62% content at Qingdao fell 8.8% last week to $72.79 on Friday, capping the first weekly drop in almost two months, according to Metal Bulletin. Prices, which remain 67% higher in 2016, may average $58 this quarter and $50 next year, according to Barclays.

As prices sank last week, port inventories in China climbed to the highest since September 2014, according to Shanghai Steelhome Information Technology Co. The holdings rose 2.6% to 110.58 million tons, the biggest percentage increase in more than a year. They’re up 19% in 2016.

Rio Tinto, the world’s No. 2 producer, is planning to cut jobs across its iron ore division in Western Australia, according to Melbourne-based spokesman Bruce Tobin, who wouldn’t confirm the number to Bloomberg News. The comments followed local media reports that about 500 jobs are to go.

‘Remains Challenging’

The market outlook remains challenging, and the miner has 1,000 initiatives under way to reduce costs and improve productivity, Tobin said on Monday. Last week, Rio announced it will suspend mining at one of its local operations for the first time since the global financial crisis to cut costs.

Miners’ shares have been whipsawed by iron ore’s sudden surge and slump. In Sydney, Fortescue Metals Group, Australia’s No. 3 shipper, dropped 7.8% last week after a 19% advance the week before, while in Brazil Vale gained 15% in the period to November 11, then lost 6% last week. In London, Rio dropped 4.4% last week.

The recent surge in prices “has to do with speculation, and trading has since become more rational,” said Dang Man, an analyst at Maike Futures Co. in Xi’an, China. “Iron ore’s fundamentals have never been great. The huge increase in port stockpiles doesn’t bode well.”

© 2016 Bloomberg

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