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Why the iron ore rally is unlikely to last

Photo by Jonathan Moore/Getty Images

Iron ore, after a terrible 2015, has enjoyed a strong start to 2016 compared to most commodity markets.

According to Metal Bulletin, the price for benchmark 62% fines currently sits at $45.73 a tonne, leaving the year-to-date gain at 5%.

From its all time record low of $38.30 a tonne set on December 11 last year, it has now put on 19.4%, leaving it on the cusp of entering a technical bull market.

While iron ore miners have found some respite from the solid rebound, Daniel Hynes and Anurag Soin, members of ANZ’s commodity strategy team, don’t expect the rally to last, forecasting the benchmark price will fall back to below $40 a tonne in the months ahead.

“Weaker than expected exports from Australia and expectations of restocking amid tighter steel markets have provided some temporary support to iron ore prices,” say Hynes and Soin. “However, we believe China will destock iron ore post the Chinese New Year as proposed steel capacity cuts are delayed.”

Based on past seasonality patterns in Chinese steel production and iron ore demand post the Lunar New Year holiday, Hynes and Soin believe that risks for benchmark price is “still heavily skewed to the downside”.

Pointing to the chart below, along with a recent 20% increase in Chinese iron ore port inventories, a delay to steel mill closures and a subdued outlook for China’s construction sector, they outline the case for the rally is likely to reverse in the period ahead.

“Outside of 2010, iron ore prices have fallen every year one month after the Chinese New Year,” say Hynes and Soin. “And in all cases bar 2010 and 2012, iron ore prices have still been lower than before the Chinese New Year some 90 days later.”

“With support from stronger Chinese steel prices unlikely to eventuate, iron ore prices are susceptible to further weakness. This will be compounded by destocking post the Chinese New Year, leading to prices pushing back below USD40/t in the coming months.”

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