Nothing shocked miners, commodity analysts and investors more in recent months than the spectacular surge in the iron ore price.
However, for all that commodity's price gains defied predictions in 2016 and early 2017, many analysts now believe new supply, high inventories, and insufficient demand are setting iron ore up for sharp losses in the second half of this year.
That's despite the Chinese government on Sunday in its annual 'work report' signalling it would maintain high infrastructure spending – a move expected to shore up steel demand. Iron ore is a key component of steel.
The most traded contract on the Dalian Commodities Exchange rose 1.8 per cent after the speech, last trading at 690 yuan. Friday's spot price of iron ore was $US91.53, down from a high two weeks ago of $US94.86.
Gavekal analysts Rosealea Yao and Arthur Kroeber wrote in a briefing note that iron ore could fall by 30 per cent or more. Meanwhile, a team of analysts at HSBC, led by Anshul Gadia, went so far as to argue that iron ore may fall below the cost of production in the second quarter of 2017 in order to to clear the massive stockpiles of iron ore in Chinese ports, which hit 120 million tonnes at the end of February.
"The longer prices remain elevated the greater the likelihood that marginal supply will be added to the market," the HSBC team wrote . "Prices may need to fall below the marginal cost of production for an extended period to drive the necessary closures and rebalance the market."
Fundamentals will take over
"We do not see economic justification for the iron ore industry to retain excess gains beyond long-term margins while the industry remains in surplus."
HSBC analysis suggests that iron ore market fundamentals should force prices lower. They include higher iron ore supply as new operators from India and Brazil's Vale ramp up production, as well as the growing iron ore stockpiles in Chinese ports.
The Gavekal analysts said that how suddenly an iron ore price fall happens will depend on how skilfully the Chinese government manages its twin objectives of cracking down on financial risk in the Chinese economy while maintaining stable growth.
They pin much of the price spike on speculative iron ore trading on the Dalian Commodity Exchange. "Speculative trading clearly plays a big role, and inventories are rising at a worrying pace," the analysts wrote.
"This has caused traders and mills to build up huge inventories in Chinese ports, with little reference to underlying demand growth, which is likely to soften this year as the property cycle slows. At some point, this speculative bubble will pop and iron prices will plummet, perhaps by 30 per cent or more."
Need to control risk
The scale of iron ore futures traded on the Dalian Commodities Exchange eclipses by 30 times that of the physical iron ore market, and has led to the build-up of huge iron ore inventories.
These inventories are being sold on, but at a slower rate than they are accumulating. Were Chinese authorities to crack down heavily on shadow financing, a key source of funds for such speculative activity, speculators could be forced to quickly liquidate their positions, pushing huge amounts of iron onto the market.
Part of Premier Li Keqiang's speech to the National People's Congress at the weekend focused on the need to control risk in the country's financial sector, making reference to shadow banking, but informed observers understand that this would be tempered by the government's overarching "stability" objective.
Credit Suisse analysts are more bullish on iron ore than most – they also expect prices to fall, but not suddenly. Like most, they point to an oversupply of iron ore eventually leading to lower prices.
However, analyst Matt Hope wrote on Monday that steel prices are currently rising and iron ore is rising with them.
"Soaring steel prices have opened wide cash margins for steel mills so they're restocking with raw materials to run flat out," Mr Hope wrote. "The construction season with peak steel demand is still to come, so we don't expect the steel price to give way yet."