A report from the Commonwealth Bank’s head of currency strategy Richard Grace says that we should stop worrying about the fall in the iron price at present because it is cyclical.
“We do not think declines in either the iron ore price or in the AUD will be sustained,” Grace said.
“As indicated in chart 1, iron ore prices tend to exhibit seasonal patterns. Between 2010 and 2013 iron ore prices declined in May by an average 11.9%. A lift in Chinese domestic supply in the warmer months (i.e. from May to September) is a factor that dampens prices at this time of year.
“The 7.5% fall in iron ore prices so far in May 2014 is thus not overly unusual. Iron ore prices typically fall each May/June, only to recover the second half of the year.”
Key to Grace and the CBA’s sanguine outlook is his belief that even though iron ore supply has “increased over the last 12 months and has put some downward pressure on iron ore prices”, global steel demand should support the price going forward.
Grace said that for iron ore to average below $90 a tonne steel demand would need to contract 4%, however, “given the improving US, European and Asian economies”, he doesn’t believe it’s likely.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.