HSBC says iron ore prices are likely to fall further in the months ahead

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Iron ore remains choppy and directionless with the benchmark price for 62% fines continuing to bump around the $60 a tonne level, continuing the pattern seen since the start of October.

After a more than 20% decline from the level seen in mid-August, the recent price action has got some wondering whether it’s formed a short-term base.

To HSBC’s metals and mining equities team, led by David Pleming, the recent stabilisation is not a sign that a bottom has been found, suggesting in a note released earlier this month that further downside is likely over the next nine months.

He explains:

Prices have found support so far this year from better than expected demand dynamics in China. The Chinese crude steel production run rate has been resilient throughout the year, with demand continuing to surprise to the upside post the price correction in Q2. We believe this momentum has started to fade as we enter the extended winter period (Oct-Mar) when China’s revised environmental policy will start imposing production shutdowns, hence slowing steel production. We believe weaker demand dynamics will push the market into a surplus position of circa 40 million tonnes during the fourth quarter of 2017.

Given that view, HSBC says that prices will likely correct further in the current quarter, seeing the benchmark fall below $60 a tonne over the first half of next year.

“In the medium term, we continue to see an expanded market surplus in 2018 of 93 million tonnes, as further low cost supply growth of 70-80 million tonnes will more than offset mine closures in China, and thereby place pressure on iron ore prices by reducing cost support levels across the industry,” it says.

According to Metal Bulletin, the price for 62% iron ore fines stood at $62 a tonne on Monday.

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