By Stuart Burns
The collapse of iron ore prices in the face of oversupply has been threatened for the last few years.
Following massive investments in Australia and Brazil, oversupply was expected to hit dwindling demand on the back of a cooling Chinese property market and an environmental crackdown on excess steel production.
Yet, despite repeated dire warnings, prices have, if anything, gone the other way, rising to over $67 per ton during May and only falling back during the following month. Finally, it seems gravity is reasserting itself and prices are beginning to ease.
While oversupply has not manifested itself as a flood, producers have shown remarkable market discipline, and it has meant ample margins remove one barrier to producers following the market down.
In part, Chinese efforts to reduce excess capacity have supported steel prices by supporting finished steel prices and, hence, steel producers' margins, rather than impact iron ore demand. A focus on pollution has boosted demand for higher-grade iron ore, supporting prices for the highest-purity Australian and Brazilian grades and reducing demand for lower-grade material produced in India, Africa and Iran.
According to Reuters, constraints on steel producers have tightened the domestic steel market, and demands that steel companies and coke producers meet ultra-low emissions targets have further supported prices for top-grade material.
Spot ore with 62% content delivered to north China was at $63.85 a ton, according to Mysteel.com. But prices have lost ground of late, with further expectations for an easing in prices by the end of the year coming amid signals China is cooling off. Fears over the effects of a trade war with America have not only hit the stock market.
A combination of cooling demand as debt tightens and new supply in Brazil and Australia has to find a home and will, it is believed, drive down prices for both steel products and iron ore. Iron ore may get dragged lower in the second half as global mine supply expands, steel prices ease off, and renewed production curbs at mills in China blunt overall demand.
Prices may drop to $60/mt in the next quarter and $55 in the fourth, according to Sun Feng, senior ferrous metals analyst at Orient Futures Co., who has more than a decade of experience tracking the market, as quoted in the Gulf Times. CRU Group also sees a slight fall, with prices bottoming just below $60 in October or November.
"The outlook of iron ore prices is not rosy, particularly in the fourth quarter," Sun was quoted as saying.
The death of iron ore has been predicted many times over the last few years. However, a combination of higher-than-expected demand and market discipline by suppliers has kept prices relatively buoyant.
Nonetheless, it does seem as if the stars are now aligned for a fall.