HSBC explains why the iron ore rally is likely to fizzle

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  • Iron ore prices have soared in recent months, especially for low and mid-tier grades.
  • HSBC doesn’t expect the surge will last, forecasting the benchmark price will trend down towards its 2019 average price level of $67 a tonne.
  • The bank says iron ore pellet prices are more likely to be impacted by supply disruptions in Brazil.

Iron ore prices have soared in recent months, especially for low and mid-tier grades.

According to Metal Bulletin, the price for 58% and 62% iron ore fines jumped to fresh multi-year highs on Monday, extending the rally from November 26 last year to 76% and 41% respectively.

They’re big moves in anyone’s language, but they’re unlikely last, says HSBC’s Metals and Mining Equities team.

They think the rally will fizzle, seeing the recent price surge reverse, and then some, before the year is out.

“We think spot prices in the high $80 a tonne region look unsustainable,” HSBC says.

“In the short term we expect prices to pull back towards $75 a tonne where there is seasonal support. The main risk to this view is that uncertainty regarding further disruptions at Vale from potential government intervention may keep prices elevated.

“However, we believe further price pressure from slowing steel production, contracting steel margins and recovering supply is likely to see prices trend towards our $67 a tonne average price forecast for 2019 as supportive factors wane.”

HSBC nominates four factors that underpin this view, including the belief the recent price spike was partially driven by golden week holidays in China, inhibiting the ability for steel mills and traders to procure ore in response to heightened concerns of supply disruptions in Brazil following a mining disaster that occurred in late January.

In HSBC’s opinion, it says there the is ample scope for other iron ore producers to take advantage of higher prices by upping output levels. It also suggests that at 3% of seaborne supply, the amount of Brazilian iron ore production suspended following Vale’s incident isn’t enough to justify the recent spike in prices.

As for restocking demand in China, the world’s largest iron ore consumer, HSBC says weather-related supply disruptions in Australia and Brazil were “already in the price” when the benchmark sat at $75 a tonne.

If there is one area that could be impacted more by reduced output from Brazil, HSBC says its likely to be pellet prices.

“In our view, the pellet market faces a more meaningful disruption, with 11 million tonnes of production, or 9% of the seaborne market, suspended,” it says.

“Premiums have risen around $10 a tonne in response, and with no immediate replacement on the horizon, we see this as more sustainable than benchmark iron ore prices.”

Unlike iron ore fines that require sintering prior to use in blast furnaces, pellets can be charged directly into blast furnaces, according to Metal Bulletin.

“Sintering of fine ores can also be a polluting process, and mills under environmental constraints may favor direct-charge ore such as lumps or pellets,” Metal Bulletin says.

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