According to the median compiled by Bloomberg on February 13, 2017, iron ore prices could drop in every quarter in 2017 to an average of $55 per ton in 4Q17. This decline is related to a supply surge resulting from Vale’s (VALE) S11D, Roy Hill, Rio Tinto’s (RIO) Pilbara projects, and BHP Billiton’s (BHP) projects, as well as from tepid demand growth.
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Axiom analyst Gordon Johnson shares a similar view. On February 12, 2017, he noted that strong restocking from China had pushed prices to “irrational levels that are soon to correct.”
Johnson added, “Should steel capacity in China come offline as inventory is being destocked, we feel this would push iron ore prices forcefully lower.” Johnson projects that iron ore prices could average $57 per ton in 2017 and $45 per ton in 2018.
According to J.P. Morgan (JPM), prices are “too elevated.”
Capital Economics Ltd. is not very positive on the surge in iron ore prices. On March 9, 2017, its chief commodities economist, Caroline Bain, noted, “We think the recent decline reflects some doubts about China’s demand.” The firm is predicting a price of $45 per ton of iron ore by the end of 2017.
China Iron & Steel Association (or CISA) is also cautious about the iron ore price outlook due to the rising port inventories. On February 23, 2017, CISA commented on the surge in iron ore prices: “That is due to speculation. This deserves attention.”
Like other analysts, HSBC analyst David Pleming believes that iron ore can’t sustain its run in the long term. On February 7, 2017, Pleming noted, “We believe the iron ore price will gradually correct itself through the course of 2017.”
Pleming added, “Q1 being the seasonally strong period for iron ore, due to weather-related supply disruptions from the two major exporters (Australia and Brazil), the price momentum might be maintained in Q1.”
In the next part of our series, we’ll take a look at steel production and capacity cuts in China.