Iron ore's rally is showing signs of cracking. After a drumbeat of warnings that the gains won't last, the commodity posted the biggest weekly slump in almost four months amid rising concern about the underlying strength of demand in China at a time of still-rising supplies.
The surge "was premised on optimism about demand", Caroline Bain, chief commodities economist at Capital Economics, said in an email. "As such, we think the recent decline reflects some doubts about China's demand."
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Why iron ore's rally is under threat
Iron ore has a very tough act to follow in 2017. After surging last year in a rally that caught out many investors, the commodity faces a challenge as supply concerns re-emerge.
Bain is predicting a retreat to $US45 a tonne by year-end, 48 per cent lower than Friday's price, and levels last seen in February 2016.
Iron ore jumped in 2016 and extended gains this year as stimulus measures led to sustained demand from China's mills, prompting record imports that helped swell port inventories to all-time highs.
While the surge boosted miners Rio Tinto and Vale, it also triggered predictions of a pullback.
Among those flagging potential weakness are banks including JPMorgan Chase, the head of Australia's central bank and even producer BHP Billiton.
"China's economy will slow over the course of this year as the authorities try to rein in credit growth," said Bain, who sees steel demand remaining stable at best. "There is the scope for prices to fall further. A combination of ongoing expansion in supply at a time of only subdued demand underpins our forecast."
Ore with 62 per cent content in Qingdao - which hit $US94.86 a tonne on February 21, the highest since August 2014 - lost 5 per cent this week to $US86.72, according to Metal Bulletin.
It slipped 7 US cents lower on Friday. Futures in Singapore and Dalian have entered corrections, down more than 10 per cent from recent highs.
Mining shares have also dropped, with BHP down 6.6 per cent in Sydney this week, the most since May.
Chicken/egg situation
Iron ore's retreat has unfolded amid a broad softening of commodity prices with base metals and crude oil tumbling amid revived concerns of excess supplies. Raw materials have also dropped as the US dollar strengthened on expectations that US interest rates are poised to rise.
This week, BHP's Peter Beaven said markets should brace for much lower iron ore as the impacts of stimulus in China slows down, and JPMorgan said prices will be closer to $US60 at year-end.
In February, Reserve Bank of Australia Governor Philip Lowe said commodities are going to come back off.
The are signs of robust supplies, including shipments from Vale's new S11D mine. Imports by China in February were a record for the month, and stockpiles at ports in the top user held at around an unprecedented 130 million tonnes as of March 10, after expanding for the five months through February, according to Shanghai Steelhome E-Commerce Co.
"It is a bit of a chicken/egg situation," Justin Smirk, a senior economist at Westpac, said in an email, referring to the potential impact from an unwinding of the holdings.
"But without a lift in demand, once the decision is made not to continue to build inventories, then that excess supply will suppress prices and the fall in prices will spur an unwinding of inventories, which will lead to a deeper correction to prices."
Smirk added: "We stand by our forecast for a significant correction in ore prices, we just can't be sure of the timing."
Bloomberg
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