Capital Economics: Now is not the time to bet on an iron ore price recovery

The iron ore price has been on an unbelievable tear as of late. From the lows struck in early April it’s up by more than 25% and several Australian “pure play” miner’s gains are even greater.

It has the market talking.

While every day seems to bring news that the price has moved higher again Capital Economics senior commodities economist Caroline Bain doesn’t think it will last.

In a research note released overnight Bain explains a combination of a surge in Chinese steel production, falling iron ore stockpiles in Chinese ports and the decision by BHP Billiton to scale back iron ore expansion have all contributed to the recent price recovery.

While fundamental reasons explain the short-term bounce, “the bigger picture is that the market remains massively oversupplied,” Bain says.

Pointing to forecasts that Chinese steel output will fall this year and iron ore market surplus will “rise by 10%, or 8m tonnes, assuming a 20% cut in China‚Äôs iron ore output”, shown in the charts below, she suggests the spot price will “stand at around $50 per tonne at end-2015”.

Although far above the $US35 per tonne level mooted by Australian Treasurer Joe Hockey, it suggests — based on Bain’s forecast — the price will fall by around 15% by year’s end.

Although this time could be different, prices may have already seen the bottom and are likely to head higher from here, given the price action seen since 2013 — a series of small counter-trend rallies in what is an otherwise huge bear market — it’s likely that many will share Bain’s view that current optimism won’t last.

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