Westpac says the worst of the iron ore rout is probably over

Photo: Bradley Kanaris/ Getty Images.

Iron ore has been in the wars recently, falling more than 20% in recent weeks, leaving it in a technical bear market.

It’s merely the continuation of the wild price movements over the past 12 months, as captured in the chart below.

After such a pronounced decline, it’s has many, especially traders, wondering what will happen next.

Is it the start of an even larger decline, or the start of yet another rebound?

To Westpac’s economics and strategy team, the near-term risks appear to be slanted to the downside.

“We have been arguing that markets were too downbeat on iron ore for some time and that a rise to the late $70s or even early $80s was likely. Thus the recent high at $80 was fully justified in our view,” says Westpac.

“However, our concern now is that iron ore markets are more likely to soften as the National People’s Conference and seasonal plant closures came into view.

“Another factor adding to this view has been that rebar inventory levels have started to rise as they did last year. This was arguably one factor that weighed on iron ore and steel prices in Q3 last year and may again do so this year.”

This chart from Westpac shows the gradual lift in Chinese inventory levels seen in recent weeks.

However, while seasonality and higher steel inventories may weigh on iron prices in the near-term, Westpac says that if further downside does eventuate, it will likely be mild in nature given a slowdown in global iron ore seaborne exports.

A key point to keep in mind is that the pace of increase of seaborne iron ore exports remains muted at best,” it says.

“Indeed on the basis of shipping data for the month of September so far, combined exports from Australia and Brazil are running at -0.1% in Q3 from the same period a year earlier.

“The lack of supply pressure should limit near term downside risks.”

Along with a moderation in seaborne supply, the vast majority of these exports are for higher grades of iron ore.

With Chinese steel mills seemingly favouring this over lower grades from an efficiency and environmental perspective at present, this is another factor to consider, especially after the substantial price falls seen over the past month.

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