Iron Ore Hit With Reality Check as RBA Says $90s Won't Last

(Bloomberg) -- Iron ore’s having a reality check on rising doubt that the exuberance that lifted prices to the highest since 2014 is entirely rational given the outlook for additional supply, the record stockpiles in China and statements of caution from some of the world’s biggest miners.

Futures in China fell on Friday, with Australia’s central bank saying it expected commodity prices to weaken again, highlighting prospects for additional iron output. On the Dalian Commodity Exchange, the most-active contract retreated as much as 4.8 percent to 674 yuan ($98) a metric ton, a two-week low, before settling at 698.5 yuan. That compares with Tuesday’s high of 741.5 yuan.

“I do think that commodity prices are going to come back off again: we shouldn’t start to think that the iron ore price is going to stay around $90,” Reserve Bank of Australia Governor Philip Lowe said in testimony to a parliamentary panel in Sydney on Friday. Lowe cited the expectation that there’ll be additional production from Brazil, as well the possibility that higher prices may encourage the return of some output in China.

After a surprise rally last year, the commodity roared into 2017 on optimism Chinese demand would prove robust, especially for higher-grade ore, and as investors bought back into raw materials. This week has seen a series of warnings the gains may be overextended, with BHP Billiton Ltd. and Fortescue Metals Group Ltd. both suggesting a pullback may be warranted. China’s top steelmakers’ group said the recent run-up was due to speculation.

“Iron ore prices have risen too fast,” Wei Fengqin, an analyst at Shanghai Cifco Futures Ltd., said by phone from the city, noting that steel was also weaker. “In the meantime, stockpiles also keep rising. Funds are likely to be leaving.”

Ore with 62 percent content in Qingdao fell to $90.50 a dry ton on Friday, following a 3.7 percent loss the two days before, according to Metal Bulletin Ltd. Prices that peaked on Tuesday at $94.86 are still 15 percent higher so far this year after surging more than 80 percent in 2016.

BHP’s View

BHP said this week the market is likely to come under pressure in the short term from moderating steel demand growth, high port inventories and incremental low-cost supply. Fortescue said while it had a positive view, the raw material may moderate, with Chief Executive Officer Nev Power noting: “Right at the moment we’re seeing a cyclical high.”

The port holdings in China expanded 0.5 percent to a record 127.6 million tons last week, according to Shanghai SteelHome E-Commerce Co. The stockpiles, which have expanded for the past eight weeks, are a downside risk, according to Goldman Sachs Group Inc. 

‘Deserves Attention’

The China Iron & Steel Association, which represents top producers in the largest steel-making country, said it expected iron ore to decline and highlighted the holdings at ports. “Prices are rising rapidly,” the group said in a statement on Thursday, citing comments from members at a Feb. 20 meeting. “That is due to speculation. This deserves attention.”

As the RBA’s Lowe noted, more supply is on the way. In Brazil, Vale SA said after reporting results this week that while it expected Chinese demand to hold through 2017, it’s still bringing on its new S11D mine over four years. India’s Vedanta Ltd. has forecast that the country’s exports may rise about 16 million tons in the financial year that starts April 1.

“There were very good reasons why prices rallied,” said Ralph Leszczynski, head of research at ship broker Banchero Costa & Co., citing the signs of recovery in China, rising steel prices and improved profitability of mills. “But whether all this justifies prices over $95? I don’t know. I think prices have risen too much too quick and a bit of a correction was overdue. Over the next few weeks it could go down even to $80.”

To contact Bloomberg News staff for this story: Winnie Zhu in Shanghai at wzhu4@bloomberg.net, Ranjeetha Pakiam in Singapore at rpakiam@bloomberg.net.

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, Jake Lloyd-Smith, Nicholas Larkin

With assistance from Winnie Zhu, Ranjeetha Pakiam