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Iron ore earns ‘big puzzle’ tag

As rally flummoxes bears, mills.

Iron ore’s rally is foxing even the experts. The commodity’s surge to the highest level in more than two years at a time of ample supplies is an enigma for steelmakers globally and prices aren’t sustainable at these levels, according to India’s second-biggest mill.

“Iron pricing is a big puzzle to all of us, as to why it is going up to $81 when there is a robust supply” and port inventories in China are at a record, JSW Steel Ltd. Joint Managing Director Seshagiri Rao said in an interview. “From the stock point of view, from the supply point of view and the demand point of view, we don’t find any reason why iron prices have to be at this level.”

Iron ore has more than doubled in the past 13 months amid better-than-expected demand in China after government stimulus. The rally, which saw prices on Monday jump to the highest level since October 2014, has gathered pace even as more low-cost mine supply has been added in Brazil and Australia. Prices are likely being driven by futures trading and will probably correct to about $60 a metric ton, according to Rao.

“ Fundamentally, if you look at the total demand-supply dynamics, I don’t think that these are sustainable prices – this we have been saying for the last one-and-a-half years,” Rao said in Mumbai. “What it indicates is that there is a huge amount of paper market, which is driving the iron ore prices.”

Ore with 62 percent content in Qingdao, China, climbed 3.9 percent to $83.65 a ton on Monday, according to Metal Bulletin Ltd., with that advance following gains in futures in Asia. The commodity has risen 6.1 percent in 2017 after surging 81 percent last year in a rally that caught out bears. On Tuesday, futures fell, signaling lower Metal Bulletin rates.

Producers have benefited from this years advance, including Brazil’s Vale SA, which has just started to ramp up output from its S11D mine. On Tuesday, London-based Rio Tinto Group reported fourth-quarter shipments from Australian operations that topped estimates, and forecast 2017 exports of 330 million to 340 million tons, in line with earlier guidance.

Bearish views
Rao’s expectation prices should drop is widely shared. Barclays Plc and Morgan Stanley have said they see a retreat this year as new seaborne supply hits the market. RBC Capital Markets, the most accurate forecaster tracked by Bloomberg in the fourth quarter, said this month prices are not sustainable. In December, UBS Group AG described iron ore as “weird”.

The popularity of iron ore derivatives in Singapore and Dalian has increased in recent years, with Goldman Sachs Group Inc. saying the SGX AsiaClear contract has more influence driving prices than the trade in China. After prices jumped last April, authorities in China clamped down on trading, spurring losses in May.

Futures traded lower on Tuesday. On the Dalian Commodity Exchange, the most-active contract was down 2.3 percent at 638 yuan a ton at 3 p.m. local time after a 7.6 percent surge on Monday. In Singapore, the price lost 1.1 percent to $80.50.

The way prices behave will depend on measures taken by the Chinese to curtail speculation in futures trading, Rao said. “Whenever the Chinese increase the margins in trading, we see a sudden dip in the prices. So it depends on what the Chinese government would do regarding the paper market.”
 
© 2017 Bloomberg L.P

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