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Iron ore extends new year ascent as slump warnings intensify

Capital Economics, World Bank skeptical the rally will endure.

Iron ore just won’t back down. Prices have advanced to near the highest level in more than two years as speculation of sustained Chinese demand for imports outweighs repeated warnings from analysts that the rally is overextended and will unravel.

“The latest price gains are not sustainable,” said Caroline Bain, chief commodities economist at Capital Economics, describing the recent advance as very speculative in nature. “It seems likely that it is premised on optimism about demand after the new year holiday,” Bain said in an e-mail, referring to the Lunar New Year which falls at the end of this week.

The raw material surged last year as stimulus in China supported steel production, buttressing record demand for imports as local mine output fell. Citigroup Inc. has said part of the explanation for recent strength may lie in a shortage of higher-quality ore, which has been hard to come by even as overall seaborne supplies rise. Among those sounding warnings about weaker prices over 2017 are the World Bank and Goldman Sachs Group.

“New low-cost capacity is expected online this year, notably Vale’s new S11D project in Brazil,” the World Bank said in its quarterly Commodity Markets Outlook, which was released on Tuesday. “These considerations, along with rising scrap supply and an expected slowdown in China’s steel production, are expected to pressure prices downward.”

Two-Year High

Ore with 62% content in Qingdao rose 1.9% to $82.69 a dry ton on Tuesday, according to Metal Bulletin. That’s near the peak of $83.65 hit on January 16, which was the highest price since October 2014. On Wednesday, SGX AsiaClear futures traded 0.4% higher at $81.20 a ton in Singapore. 

Iron ore’s rally, as well as advances in base metals, has benefited miners’ shares. In Australia, BHP Billiton, which reported quarterly output figures on Wednesday, rose as much as 3.5% in Sydney to the highest level since 2015, as Rio Tinto Group and Fortescue Metals Group also advanced. Brazil’s Vale is 39% higher in 2017.

Vale is bringing on S11D this year, adding to seaborne supply. In Australia, BHP, the world’s biggest mining company, reported second-quarter production rose 9% to 60 million tons in the three months ended December 31, up from 57 million a year earlier and topping the 59 million median estimate of five analysts surveyed by Bloomberg.

Goldman’s  Jeffrey Currie, head of commodities research, told Bloomberg TV on Tuesday that he’s negative on the outlook for iron ore even as prospects for most raw materials are bullish. “If we think about Brazil, Australia adding supply to the market, it’ll likely put downward pressure on prices,” he said.

The bank’s bearish view is shared by Citigroup, as well as Barclays. While Citigroup has raised forecasts for the first and second quarters to $77 and $70, it’s sticking with a fourth-quarter outlook for a drop to $53. Barclays has said current levels aren’t sustainable as growth in China may slow, while new seaborne supply hits the market and demand for high-quality ore eases.

© 2017 Bloomberg

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