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‘Hot Commodity’ Iron Ore Is Destined to Cool, Citigroup Says

(Bloomberg) -- Iron ore, dubbed by Citigroup Inc. as one of the hot commodities of 2016, looks set to cool off. Prices may soon sag as supply rises and steel demand fades, the bank said, adding to a chorus of forecasters who are calling time on an unexpected rally.

The raw material will average $51 a metric ton in the final quarter and $45 in 2017 under the base-case scenario, analysts led by Ed Morse said in a report received Tuesday. That compares with Metal Bulletin Ltd.’s 62 percent content price of $61.75 a dry ton on Tuesday, and a year-to-date average of $53.64.

“Believe it or not iron ore, coal are the hot commodities of 2016,” the bank said in the note, advising that investors “fade them as commodities stumble to rebalance.” It added: “Don’t expect the strength to last. Structurally the world remains oversupplied with relatively low-cost material.”

While iron ore has soared more than 40 percent in 2016 after three annual losses, banks are now queuing up to forecast the likelihood of further weakness ahead, with Morgan Stanley and UBS Group AG also flagging prospects for declines as 2016 unfolds. Citigroup said that although iron ore’s strength may persist into October, a weakening of demand, coupled with rising mine supply, would probably hurt prices thereafter.

Iron ore “may face strong headwinds towards the end of 2016 and most of 2017,” the analysts wrote, calling it a “darling” of commodities so far this year. “Supply-and-demand balances in 2017 point to lower prices, with Chinese demand deteriorating and new projects by Vale and Roy Hill ramp up further.”

Mine Startups

Prospects for increased supply include output from Australian billionaire Gina Rinehart’s Roy Hill project in the Pilbara, as well as expansions by top shipper Vale SA in Brazil, which is set to start up its S11D project by the end of 2016. Production from low-cost miners remains strong and there are signs of inventories building across ports in China, according to Citigroup.

Morgan Stanley has forecast that prices may tumble back to $40 a ton this half as the approach of winter in China blunts steel demand and output, according to a report earlier this month. In July, UBS said iron ore’s revival in 2016 has prompted mine restarts, adding to global supplies and potentially causing prices ease into next year.

Not everyone is bearish. Iron ore will probably extend this year’s rally as China takes further steps to stoke growth and the dollar weakens, according to Prestige Economics LLC’s Jason Schenker, who made a rare bullish call in the final quarter of last year even as the commodity posted a double-digit loss.

Miners’ Views

Miners’ views are mixed. Last week, BHP Billiton Ltd.’s Andrew Mackenzie said there’s more risk for prices to the downside as the rampup by low-cost producers continues. Fortescue Metals Group Ltd., Australia’s third-biggest miner, said on Monday that steel demand and iron ore prices may be supported as increased infrastructure spending in China is likely to continue.

Steel rebar futures in China have soared 46 percent this year, recovering after five annual declines, as stimulus from the government and a property rebound lifted demand at a time of low inventories. While Citigroup noted China’s steel production had surged earlier this year, conditions were seen weakening.

“Our bearish call on iron ore stems primarily from a bearish steel call,” Citigroup said. “ Economic indicators suggested sluggish growth momentum for the rest of the year, which may put more pressure on steel demand.”

To contact the reporter on this story: Jasmine Ng in Singapore at [email protected] To contact the editors responsible for this story: Jason Rogers at [email protected] Jake Lloyd-Smith, Alexander Kwiatkowski

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