Iron ore is up again but the rally's days may be numbered

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Iron ore prices continued to push higher on Tuesday, but the rally’s days may be numbered.

According to Metal Bulletin, the spot price for benchmark 62% fines rose by a further 0.85% to $61.75 a tonne, extending its gains so far this year to 41.7%.

There was also a significant jump recorded in lower grade ore with the spot price for 58% fines rising 1.22% to $48.95 a tonne.

Chinese iron ore futures also pushed higher in overnight trade, suggesting the gains may extend into a fourth consecutive session.

The most actively traded January 2017 contract on the Dalian Commodities Exchange finished trade at 455.5 yuan, up 0.89% for the session.

While the price action recently is nothing short of bullish, Citibank’s commodity research team believes that the so-called “hot commodity” of 2016 will cool significantly in the months ahead, predicting that prices will face strong headwinds towards the end of 2016 and most of 2017.

“Iron ore market fundamentals have provided little support to this rally, as seaborne supply remained strong from low cost production, and inventories at Chinese ports built 11.5 million tonnes YTD while those at mills are generally stable,” said researchers at the bank.

“Instead, iron ore prices largely followed a rally of Chinese steel product prices, which was likely a result of strong property new starts and investment, robust growth of auto production, and temporary closure of mills due to key events and environmental regulations.”

Citi believes that the recent upward momentum in prices should persist over the next one to two months before reversing towards the end of the year.

“We expect steel to remain in the driver’s seat of leading price movements in the ferrous metal space, unless seaborne supply faces large disruptions,” it wrote. “Thus our bearish call on iron ore stems primarily from a bearish steel call.”

“Citi’s base case for iron ore is for prices to average $55/t in 2H’16 before falling in 2017 to an average of $45/t.

“Iron ore prices still have to navigate through the ongoing rally, which may persist until early October thanks to the upcoming peak season in construction, and this might allow prices to average $59/t for 3Q’16,” it adds.

According to Metal Bulletin, the spot price for benchmark 62% fines has averaged $58.78 a tonne (CFR) so far in the second half of 2016. Year to date this average falls to $53.66 a tonne (CFR).

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