Iron ore’s 2016 rally may be about to face a
challenge from the changing of the seasons. Morgan Stanley has forecast
that prices may tumble back to $40 a metric ton this half as the approach of
winter in China typically blunts steel demand and output.
“Our short-term forecast still features a
September-October seasonal pullback as China’s steel demand and production rate
abates,” analysts including Joel Crane wrote in a report. Over the past 10
years, iron ore prices have on average dropped in September, October and
November, according to the report.
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Iron ore has soared in 2016, snapping
three years of declines, as stimulus and a credit-fueled property boom in China
lifted demand. The upsurge confounded expectations for further losses, and
prompted banks including Morgan Stanley and Goldman Sachs Group Inc. to revise
forecasts higher earlier this year. While China’s steel production has been
robust so far in 2016, demand may ease as the summer ends, according to Morgan
Stanley’s note.
The “season is mature now; the reliable
September-to-October pullback is nigh,” Crane wrote, adding that rising mine
production in Australia and Brazil may also help to blunt prices. “Beyond the
seasonal pullback, ore prices should also become increasingly capped in the
second half by ongoing supply growth.”
Record Rate
The raw material with 62 percent content delivered to
Qingdao has risen 42 percent in 2016 to $62.03 a dry ton on Tuesday, according
to Metal Bulletin Ltd. The gains have come as steel prices surged and daily
rates of output in China hit a record, while shipments of steel products held
near an all-time high. Futures in Singapore and Dalian gained on Tuesday.
Construction in China typically slows in the colder,
winter months. Asia’s top economy accounts for about half of global steel
production, and its mills are the world’s largest buyers of seaborne ore.
Winter constraints on Asia’s trade and deployment of steel are profound,
according to Morgan Stanley.
The bank maintained its forecasts for the raw
material to average $45 a ton this quarter and $35 in the final three months of
2016, with a base-case estimate of $40 for the second half.
More Supply
Morgan Stanley flagged prospects for increased output
from Brazil’s Vale SA, which is
expected to start output from its S11D project before the year-end. There’s
also new supply from Australian billionaire Gina Rinehart’s Roy Hill project in
the Pilbara, which is ramping up production this year.
As the availability of supply increases at Chinese
ports, mills’ appetite to build iron ore inventories will remain low in the
near term, BHP Billiton Ltd. said in a statement on Tuesday as it announced
full-year underlying profit sank 81 percent. Steel output from China is expected to soften over
the rest of 2016, the world’s top mining company said.
BHP Chief Executive Officer Andrew Mackenzie said on
a call after the results that while his view on iron ore hadn’t changed,
there’s more risk for prices to the downside as the rampup by low-cost
producers was continuing. For BHP, iron ore would remain a very high margin
business, he said.
Source: Bloomberg