There's a 'strong chance' of a short-term iron ore reversal, but in the end it's still going lower

TORSTEN BLACKWOOD / AFP / Getty Images

Iron ore prices have had a poor few months, tumbling from close to $95 a tonne in late February to below $56 earlier this week, leaving it languishing at an 11-month low.

It’s got a few people asking questions — not only as to what has driven the slump, now standing at over 40%, but also when the rout will come to an end.

While some believe that an influx of Chinese commodity speculators has played a large part in the move, seeing volumes and trading margins soar higher as prices in futures markets have slumped, not everyone thinks that’s been the overriding factor behind iron ore’s awful run.

Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank, is one man who likes to keep a close eye on developments in the market, and he thinks that the recent slump has been driven by more fundamental factors.

And, in his opinion, he thinks there’s a strong chance that the iron ore rout may come to an end shortly, at least in the near-term.

“Rising seaborne and domestic Chinese supply and muted restocking demand help explain the recent slump in iron ore prices,” he says.

“The higher prices that prevailed earlier this year likely reflected temporary factors, such as seasonal rains which disrupted Australian iron ore exports.

“However, with steel mill margins spiking higher, we see a strong case for iron ore prices rebounding modestly in the next couple of months.”

So there’s grounds for a modest reversal in his opinion, and potentially an opportunity for investors to scoop up beaten down iron ore miners.

However, while Dhar sees a strong chance that prices will recover modestly in the short term, he, like many others, thinks the longer-term trajectory is still lower.

“Surplus pressures will likely return as China transitions away from its commodity intensive sectors following elections in Q4 2017,” he says.

“We believe iron ore prices will decline to around $US45 a tonne by Q2 2018.”

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