Citi just gave its iron ore forecast a massive downgrade to below $US50 a tonne by the end of 2017

Image: Ryan Pierse / Getty Images.

Iron ore prices are set to fall below $US50 a tonne by the end of 2017, according to the latest research by Citi’s equity analysts.

The Citi team took a bearish view on the outlook to downgrade their previous price forecasts:

It’s a significant revision, with Citi dropping their forecasts to the end of 2017 to $US48 a tonne, down from $US60.

In doing so, the analysts placed a premium on the fact that this year’s steep price falls occurred much faster than they expected.

Spot prices for benchmark 62% fines closed last night at $US55.75 after reaching $US94 a tonne in late February.

According to Citi, the previous price points above $US90 a tonne were driven in part by the closure of lower quality induction furnaces in China, which led to strong demand for higher grade ores in the remaining blast furnaces.

Over the course of 2017, however, iron ore inventories have built up rapidly which has put downward pressure on prices.

Citi said that the supply surplus at Chinese ports stood at 70 million tonnes in 2016, but excess stock has now built to more than 140 million tonnes.

The analysts said that more supply is still on the way from lower grade ores. They noted that cyclical factors are forcing lower-grade suppliers to offer discounts as production mills prefer the use of higher grade ore given strong margins for steel production.

While iron ore prices have fallen significantly, it hasn’t been accompanied by a commensurate fall in steel rebar (of which iron ore is the key component).

In fact, the Citi analysts said that the current discrepancy between steel prices and iron ore was at its widest point since Q2 2015. Prices for the two commodities have historically had a strong correlation, but this chart shows the recent split:

In looking at the impact of lower iron ore prices on Australia’s major miners, Citi reduced their price targets for both BHP and Rio.

However, they maintained their buy ratings for both stocks, citing strong cash flow generation and the ability to unlock value from other areas of the business.

Fortescue wasn’t so lucky, with Citi’s analysts downgrading the stock to a sell rating with a price target of $3.90.

That’s not surprising given the bank’s downward revisions for iron ore prices, as Fortescue is a pure-play iron ore miner.

BHP closed down 0.13% today at $22.96, while Rio was 0.27% lower at $59.92. Fortescue closed up 1.06% at $4.75.

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