CREDIT SUISSE: A rebound in the iron ore price is likely


The race to put out the lowest iron ore forecast is on in earnest. $45, $40 and even $20 have been bandied around the markets in recent months. Weak steel prices, tepid Chinese steel demand, falling Chinese steel production and a continued ramping up of seaborne exports from Australia and Brazil have seen analysts trip over themselves to call the spot price lower.

With the vast majority getting whipped up into a bearish frenzy, perhaps its time to become a contrarian. As world renowned investor Warren Buffett’s famous saying goes, be fearful when others are greedy and be greedy when others are fearful.

Matthew Hope, research analyst at Credit Suisse, is certainly not an iron ore bear, at least over the short to medium term. With the spot price now sitting at $49.65 a tonne, according to pricing from Metal Bulletin — the lowest level seen since early July — he believes a modest rebound may be on the way.

“Following a two-week buyers strike that started in mid-October, the price of iron ore delivered to China fell below $50/t on 28 October. The price has been here twice before in 2015 – in April and July – and both times the price quickly sprang back to the $55-$60/t range as mills needed to restock,” notes Hope.

Despite the onset of winter in China, a period that traditionally sees Chinese steel production slow, Hope believes that low Chinese inventory levels, shown in the chart below, and the likelihood that Chinese iron ore mines will cease production due to production costs becoming uneconomic, will likely underpin spot prices in the months ahead.

“So the next few months look to be finely poised between demand and supply,” wrote Hope.

“Demand looks set to fall in November on seasonal factors that may be compounded by curtailments. But if the price stays below $50/t, we believe China’s domestic iron ore supply will drop on financial factors ahead of the usual seasonal slowdown over China’s winter.”

“We expect the iron ore price to remain in the $50-$55/t range for the next few months.”

Beyond the medium term, Hope, like the majority, believes that the spot price will fall below the $50 a tonne level and remain there.

“We expect that point will arrive, but only when seaborne supply to China increases to such an extent that China’s price sensitive domestic supply can close without causing any iron ore shortfall. That should come next year, perhaps in 2Q-16 or even 3Q, depending on the ramp-up trajectory of Roy Hill, Minas Rio and Vale’s new projects.”

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