Analysts are bullish on iron ore as prices continue to surge

Ralph Orlowski / Getty Images
  • Iron ore prices surged again on Friday, closing at or near the highest levels since early 2014.
  • Chinese futures surged to record highs on Friday evening, pointing to further gains in physical markets on Monday.
  • Capacity usage at Chinese steel mills continues to ramp up. Despite this, steel inventories are still falling.

Iron ore prices surged again on Friday, closing at or near the highest levels since early 2014.

And with Chinese iron ore futures surging to fresh record highs on Friday evening, there could be more gains to come on Monday.

According to Metal Bulletin, the spot price for benchmark 62% fines rose 1.5% to $105.32 a tonne, largely reversing a similarly sized decline seen on Thursday.

It now sits within a whisker of the five-year high of $105.78 a tonne set on Wednesday last week.

Gains were also seen across lower and higher grades on Friday.

65% fines increased 0.7% to $119.30 a tonne while 58% fines gained 0.3% to settle at $87.02 a tonne. Both closed at fresh multi-year highs.

Pointing to the possibility of further gains in physical markets on Monday, Chinese iron ore futures continued to surge in overnight trade on Friday, finishing the session at record highs.

The September 2019 contract in Dalian rose to 749 yuan, surpassing the previous record peak of 735 yuan set a session earlier. Coking coal and coke contracts also gained, finishing at 1,401 and 2,305 yuan respectively on Friday evening.

The gains in bulk commodity futures came despite profit-taking in Chinese steel futures traded in Shanghai.

According to data from the Shanghai Futures Exchange, the October 2019 rebar and hot-rolled coil contracts finished at 3,874 and 3,727 yuan respectively, off the lows seen earlier in the session but below the levels seen on Thursday.

SHFE Hot Rolled Coil ¥3,727 , 0.81%
SHFE Rebar ¥3,874 , 0.28%
DCE Iron Ore ¥749.00 , 2.96%
DCE Coking Coal ¥1,401.00 , -0.18%
DCE Coke ¥2,305.00 , 0.63%

According to data released by Mysteel Consultancy, capacity utilisation rates at Chinese steel mills jumped 2.07 percentage points to 73.2% last week, leaving them at the highest levels since mid-July last year, according to Reuters.

Despite the lift in capacity usage, steel inventories held by Chinese traders continued to decline over the same period, falling by 514,800 tonnes to 11.62 million tonnes, according to separate data from Mysteel.

With Chinese steel production ramping up, Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank, says the stars have aligned to keep iron ore prices supported at current levels for “a little while longer”.

“Declining iron ore port stockpiles are our major worry,” he said in a note released last Friday.

The fact that prices are already over $100 a tonne with port stockpiles around 132 million tonnes means that shortage concerns are likely to intensify as we continue to see port stockpiles unwind.

“We’ve upgraded our benchmark iron ore price by 7% to $92 a tonne in 2019 and 3.5% to $74 a tonne in 2020.”

Recent developments has also seen commodity researchers at UBS upgrade their iron ore price forecasts for the next two years.

With iron ore trading above forecasts, we lift prices for 2019 and 2020 by 8% and 4% respectively to $90 and $80 a tonne respectively,” the bank said in a note released last week.

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