Macquarie thinks $50 a tonne for iron ore will stick

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The iron ore price has enjoyed a good run of late, rallying 35% from the record low level struck in mid-December.

While many suggest that the recent stellar run won’t last, pointing to seasonality patterns, increased seaborne supply and reduced steel production in China as catalysts for a likely fall, analysts at Macquarie have adopted a different view, suggesting that risks to their already bullish $50 a tonne average forecast for this year are now “evenly balanced”.

“The key reason for our more optimistic view towards iron ore for 2016 was the speed at which supply has adjusted to lower prices,” Macquarie says.

“Over the two years to 2015, the major five suppliers increased exports into the seaborne market by more than 240 million tonnes (mt), but for 2016 they will add less than 30mt into the market. Moreover, recent earnings presentations from Rio Tinto and Vale have lowered guidance toward potential volumes for this year. While low-cost supply surged, high-cost supply has exited the market extremely quickly, with 125mt of seaborne supply exiting over the past two years and as much as 250mt of Chinese domestic ore exiting.”

Alongside an expected improvement in the balance of the market, Macquarie point to low steel inventories in China, along with improved margins at steel mills, as factors that may underpin the iron ore price.

“With demand expectations improving and steel inventory low, steel prices should continue to do well,” say Macquarie. “Besides the better margins, a potential seasonal pick-up in orders seems to be another reason for their heightened interests in producing steel again.”

Should steel prices continue to recover, Macquarie suggests that Chinese mills may look to increase their steel production, leading to a scramble for iron ore supply at a time when Chinese inventories are not at elevated levels.

“Post Chinese New Year, we expect steel output to move sequentially higher, and even without any restock this will help iron ore demand,” says the bank. “We are happier with iron ore around the $50/t mark, and would be buyers of the current forward curve, particularly Q2 2016.”

Many will disagree with Macquarie’s analysis, but given the strength of the rebound seen so far this year, their call is looking alright for the moment.

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