Barclays warns iron ore prices are ‘set to tumble’

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  • Iron ore markets have fallen sharply since the start of March with prices turning negative for the year.
  • Barclays Bank warns there’s likely to be further declines to come, suggesting prices are “set to tumble”.
  • It expects mid-and higher grades are most susceptible to further price declines.

After a strong start to the year, iron ore spot markets have tumbled since the start of March.

According to Metal Bulletin, the spot price for benchmark 62% fines has fallen by over 13% since March 1, leaving it just above the $70 a tonne level, the lowest it’s been since mid-December last year.

Commodities researchers at Barclays Bank think there’s a lot more downside to come.

“We believe iron ore is set to tumble,” says Dane Davis, Commodity Research Analyst at Barclays.

“We think that [the June quarter of 2018] should be the nadir for the iron ore market, as we now forecast prices to reach an average of $55 a tonne.”

This table from Barclays shows the bank’s latest iron ore price forecasts, along with those for Chinese steel production in 2018.

Source: Barclays Bank

Davis says elevated levels of Chinese steel mill profitability, a driving force helping to underpin prior gains in iron ore prices since the beginning of the year, especially for mid and higher grades, will likely weaken further in the months ahead, something that he says will create headwinds for steel and iron ore prices.

Davis says there’s three factors underpinning this call: that Chinese steel demand will weaken this year, the removal of most restrictions on steel output that will end in the days ahead, and iron ore port inventories sitting at the highest level on record.

On the back of weaker housing market conditions, Davis says Chinese steel demand looks set to decline this year.

“Initial 2018 macroeconomic data from China has been delayed as a result of late start to the Chinese New Year,” he says.

“However, one early indicator, the steel market PMI, shows a slowing market. The steel market PMI reading declined to 49.5 in February from 50.9 in January, and has generally been on a slowing trend since last July.

“Weakening end-use steel demand makes sense, given the slowing housing market in 2018.”

Source: Barclays Bank

And while extensions to steel output restrictions in some major Chinese production hubs have been announced in recent weeks, Davis still expects overall output to ramp up, further pressuring steel prices.

“As curtailments end, we expect domestic crude steel production to ramp up. With more relatively inefficient output entering the market, profitability rates should decline in [the coming quarter],” he says.

Davis says Chinese steel inventories have climbed in recent weeks in expectation of strong demand once the New Year celebration ends, noting that overall inventories have risen from 773 kilotonnes in mid-December to 1,852 kilotonnes as of the first week of March, largely reflecting a massive build in rebar stocks.

“If demand in [the coming quarter] is weaker than expected, prices may react negatively as the market moves into a short-term surplus,” he says.

“To give further context, at this point last year steel product inventories reached 1,654kt. 2018 has a higher volume of steel product inventories for what could be a weaker year of steel demand, a bearish implication for steel prices.”

Along with the outlook for steel supply and demand, Davis says bloated Chinese iron ore port inventories, comprising largely lower grades, also carry the risk of pushing prices lower, especially for high and mid grade ores.

“Port stock inventories for iron ore have continued to climb and now stand at 160 million tonnes,” Davis says.

“This is the highest level on record, and represents a 13 million tonne gain in 2018 alone.

“Although the material sitting in port inventories is not currently favoured by the market, if and when the switch to lower-quality ores occurs, the abundance of the material will likely result in a compression in the benchmark price and a narrowing of the spread between high and low-quality ores.”

Source: Barclays Bank