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Should Iron Ore Investors Brace for More Downside?

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Part 2
Should Iron Ore Investors Brace for More Downside? PART 2 OF 10

Why Analysts Expect Iron Ore Prices to Fall Further

Iron ore forecasts

Analysts have been long expecting a downturn in iron ore prices. Due to the resilience in prices, some analysts upgraded their short-to-medium-term forecasts as they were still not positive about the long-term fundamentals of iron ore (COMT) (DBC).

Why Analysts Expect Iron Ore Prices to Fall Further

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Analysts turning bearish

As reported by The Telegraph, HSBC analyst David Pleming said that he expected a “massive fall” in iron ore prices in 2017. He believed that the growing supply glut combined with the softening steel demand in China would lead to this fall. UBS analyst Myles Allsop said that “we see headwinds from falling spot iron ore prices and slowing China momentum after 12 months of generally better-than-expected economic data.”

The report also cited Bernstein analyst Paul Gait, who believes that iron ore prices should settle somewhere between the extreme highs and lows of the last two years. He added that “it’s always distressing when we see price collapses like this, but you should be wary of the surge of euphoria on the way up, and the surge of despair on the way down.”

Barclays is bearish on the medium-to-long-term prospects of iron ore. It believes that the slump could encourage mills to shift to lower grade ore. Investors should note that BHP Billiton (BHP), Rio Tinto (RIO), and Vale (VALE) produce higher grade iron ore than their smaller peers. The above graph shows Barclays’ forecasts for commodities, including iron ore.

Macquarie also thinks that the drop in iron ore prices is not over yet. According to Business Insider, Macquarie analysts stated that “as per any other classic pricing cycle, supply has responded to high prices and margin incentives and ultimately overwhelmed demand, while restocking has come to an end.”

Fall expected to continue

Axiom Capital Research is usually bearish on iron ore prices. As reported by Barrons, Axiom analyst Gordon Johnson believes that “there is significant risk to iron ore prices over the next three to four months.” He attributed this risk to “(1) structural oversupply, and destocking that appears to have taken hold amidst record inventory levels, and (2) Chinese Wealth Management Product (“WMP”) investors now betting that iron ore prices are headed lower in the overnight market.”

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