Can China continue to play host to rising iron ore prices?


Are global iron ore prices headed for a squeeze? A recent report from Citi Research paints a bleak outlook for the key steel-making raw material. Citi expects prices to decline in the fourth quarter, with a three-month price forecast of $115 a tonne, based on its dim outlook for steel output in China. Recent news reports cite other analysts, too, lowering their price estimates for iron ore.

Average iron ore prices in the September quarter, so far, are up by 5.4% over the preceding quarter and by 18% over a year ago.

There are two major concerns. One is that China’s steel output has been increasing at levels that do not appear sustainable. Citi’s report says that excess steel production is finding its way into international markets, and it expects steel output to turn weaker in the fourth quarter. But a Financial Times news report also quotes Macquarie Securities’ contrarian view with estimates at $150-160 a tonne in the fourth quarter.

China’s economic indicators have been getting better, but what is not certain is if this will continue. If growth sustains and investment demand recovers, then China’s appetite for commodities will soar. But a softening can hurt commodity prices. Watching China’s economic data in the months ahead can provide clues on what can happen to commodities such as iron ore.

Then, there is the supply issue. Iron ore output is increasing, as projects planned in the boom years are coming online. Output has been rising in 2013 so far, despite which prices have not fallen sharply. But if demand weakens, this can escalate the impact on prices. Citi also quotes a downside risk from India resuming iron ore exports.

But visibility on iron ore prices beyond the short term is hazy. Demand for steel in China and other emerging markets is one major factor. But steel demand from the developed world—where markets such as the US and the UK seem to be recovering—too could play a role in influencing demand and prices in the medium to longer run. That’s why it may also be a safer bet to take a short-term view on prices.

Source from : LiveMint