CBA: Don't get too excited about the rally in iron ore -- it's unlikely to last

The iron ore price has enjoyed a stellar run of late, rising nearly 30% to the highest level seen in over two months on Tuesday.

However, with Chinese steel demand weak, production falling and elevated prices inviting high-cost Chinese iron ore producers to stay in production, the outlook for prices, and Chinese import volumes, remains lower.

That’s the downbeat assessment of Vivek Dhar and Kofi Mensa, commodity researchers at CBA, who believe that in the absence of a broad-based
stimulus package for China’s commodity-intensive sectors, the outlook for iron ore prices, and demand, remains weak.

Here’s a snippet from a research report they released this morning.

“The fall in China’s iron ore imports in August raises concerns that the recent yuan devaluation has improved the competitiveness of China’s domestic iron ore supply. We previously saw mothballed high-cost supply in Hebei re-entering the market when iron ore prices rose above US$60/t (CFR China). The devaluation of the yuan may have improved the viability of domestic supply with iron ore prices in the mid US$50s. While we still expect low-cost iron ore supply from Brazil and Australia to displace high-cost supply in China, we may still see China’s iron ore imports fall this year due to weak steel production and demand”.

Without another commodity-intense stimulus package from China’s government – something that the pair see as unlikely – they remain of the view that the spot iron ore price will come under renewed selling pressure.

Along with weak Chinese steel production and weak domestic steel demand, the pair point to the commissioning of the 26.5 million tonne p.a. Minas Rio project in Brazil, along with the start-up of the 55 million tonne p.a. Roy Hill project in Australia, as examples of increased seaborne supply that will likely weigh on prices in the period ahead.

On Tuesday the spot price for benchmark 62% grade iron ore rose to $57.42 a tonne, the highest level since early July. Dalian iron ore futures have surged by 4.70% on Wednesday, pointing to the likelihood of another strong surge in the spot price tonight.

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