'Peak in sight': Morgan Stanley doesn't expect the iron ore rally will last

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  • Iron ore prices have been on a tear over the past six months, lifting as much as 130% across major grades.
  • Morgan Stanley commodities strategists believe prices are “now starting to approach peak levels”.
  • It expects the price for benchmark 62% fines will fall to $78 by the end of the year, driven by softer Chinese steel demand and a recovery in Brazilian iron ore shipments.
  • The benchmark price slumped 2.3% to $106.11 a tonne on Tuesday, according to Metal Bulletin, its largest one-day percentage decline in over two months.

Iron ore prices have been on a tear over the past six months.

From late November last year, the price for major iron ore grades have surged by 50% to 130%, closing at fresh multi-year highs on Monday.

However, while lower grade 58% ore continued to rally on Tuesday, the price for 62% and 65% fines fell heavily, logging the largest decline in months.

Marius van Straaten and Susan Bates, commodity strategist at Morgan Stanley, believe there’s likely to be further declines to come.

“We believe the iron ore price is now starting to approach peak levels,” the pair said in a note released on Tuesday. “We expect the iron ore price will come down in the second half of this year.”

There are two factors underpinning their view.

The first, that Chinese steel production, running at record levels in April, will start to slow in the months ahead.

“There are signs that steel output will slow, as utilisation rates fell 1% from their early May peak as peak construction season ends, while summer production curbs are in place in Tangshan until September,” Van Straaten and Bates said.

Secondly, they see a rebound in Brazilian iron ore shipments in the months ahead, helping to reduce the steep draw in Chinese iron ore port inventories that has been seen as a major catalyst behind recent price gains.

Morgan Stanley

“Brazilian shipments recovered from 2.5 million tonnes per week in early April to 5.5 million tonnes per week,” they said, referring to disruptions to supply as a result of a deadly mining accident at an iron ore facility operated by Brazilian minier Vale in late January this year.

“Taking into account the around seven week shipping time to China, this bounce in shipments hasn’t hit China’s ports yet, but arrivals should gradually improve from here.”

Combined with the expected moderation in Chinese steel production, Van Straaten and Bates expect “the draw on port stocks will ease in the second half of this year”.

Morgan Stanley is forecasting the benchmark price for 62% iron ore fines will fall to $78 a tonne by the end of 2019, although the bank admits the risks to this view remain slanted to the upside.

“The current market deficit will narrow, but not disappear, on modestly improving supply and easing Chinese demand,” Van Straaten and Bates said.

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