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Why Analysts Are Still Negative on Iron Ore in the Long Term

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Analysts are still negative

Many analysts have upgraded their iron ore price forecasts due to the recent strength in prices. However, many are still not confident about the long-term fundamentals of the commodity.

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Macquarie’s take

Macquarie believes there’s a disconnect between the prices and fundamentals of iron ore. In a note, it said, “Iron ore prices have remained disconnected to the fundamentals in our view since late October, ranging from $US60-83 a tonne despite clearly abundant supply of iron units (albeit shortages of some higher grade material).”

It added, “We have updated our demand numbers, reflecting the recent strength in Chinese demand and a stronger ex-China view. However, we still believe iron ore supply remains abundant with prices above $US60 a tonne, and with Chinese mine costs lower in US dollar terms given recent RMB depreciation, we do not see a return of cost inflation in iron ore mining which justifies prices anywhere near current levels.”

UBS’s take

Wayne Gordon, executive director of commodities and exchange at UBS, is also surprised by the strength in iron ore prices. He said, “The market’s been balanced, if not in a slight deficit for iron ore, which is remarkable because we had that massive surplus the previous year. But next year, you’ll start to see that building up with a surplus again.”

Morgan Stanley is also bearish on bulks. It believes that in 2016, iron ore prices were mainly supported by China’s credit-backed infrastructure programs. Next year, a surplus in the iron ore market should expand, which could lead to depressed prices.

While brokers have upgraded their short- to medium-term forecasts, they’re still not positive on the long-term fundamentals of the commodity (COMT). The fall in the expected price is mainly due to supply additions that are expected to hit the market in 2017.

Going forward, these additions could pressure the cash flow of miners such as BHP Billiton (BHP), Rio Tinto (RIO), Vale SA (VALE), and Cliffs Natural Resources (CLF).

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