Iron ore: High-cost supplies are returning
The iron ore market is showing surprising strength. Since the beginning of the month, prices have moved back above $60 per tonne.
We believe this strength is mainly a reflection of positive sentiment rather than improving fundamentals.
Iron ore demand from Chinese steel mills has moved beyond the seasonal peak and should continue to fall over the coming months.
Chinese steel production is unchanged from last year, despite the government’s stimulus measures. While steel inventories are below last year’s level, they were building again more recently.
Taken together with persistently high exports, which have led to increasing protectionism around the world, this signals overproduction.
We do not believe that the current strength in steel prices will last. Meanwhile, we are observing signs that higher-cost iron ore supplies are returning to the market.
Exports from Middle Eastern and West African producers to China have picked up again this year, adding to ongoing low-cost supply growth from Australia and Brazil.
Hence, we remain of the opinion that the iron ore market is oversupplied and expect prices to come down. This morning, China-traded prices are down more than 4%.
Positive sentiment rather than improving fundamentals is supporting the iron ore market. Due to falling demand from China’s steel mills and rising supplies, we expect prices to come down from today’s levels.
We reiterate our short-recommendation as well as our hands-off stance towards the miners.
Carsten Menke is Julius Baer’s Commodity Research analyst