The price of iron ore has scaled new heights in recent days but most mining analysts are proving reluctant to update their forecasts on key mining stocks to match.

The iron ore spot price rose 3.3 per cent to $US86.62 a tonne on Friday – a 2½-year high. Chinese iron ore futures, dominated by speculators, soared higher to hit $US100 a tonne on Friday and $US101.50 on Monday.

Iron ore soared to $US86.62 a tonne on Friday, while futures contracts hit $US100.

Many investors had expected iron ore prices to fall off after the Chinese New Year, believing that stockpiling before the holiday had been driving the recent rally. However, Chinese buyers returned last week to drive fresh gains for the iron ore price.

The price is significantly above the level that analysts had pencilled in for the metal at the start of the year.

Macquarie, for example, factored in an iron ore price assumption of $US61 a tonne in its report on BHP last Friday, up from a $US54 a tonne price forecast in January. UBS’s estimate puts iron ore at $US56 a tonne, with an upside scenario of $US66. Credit Suisse’s forecasts are for $US65 a tonne this quarter falling to $US52.5 by 2018. Following Rio Tinto’s result last week, Citi upgraded its 2017 iron ore forecast 15 per cent to $US65, which is still below current prices.

Indeed, price estimates are also above the internal estimates used by many mining stocks to guide their own profit forecasts, said Citi head of equity strategy Tony Brennan.

“Prices aren’t yet fully factored into earnings estimates,” he said. “Not just for iron ore, but for oil and other base metals too. Particularly for fiscal year 2018,” he said.

“This has meant earnings estimates are lower than they would be if current commodity prices continued indefinitely.”

However, analysts aren’t rushing to match their 2017 estimates to iron ore spot prices. Global commodity analyst at UBS Lachlan Shaw said what mattered wasn’t so much where iron ore is now but where it will go.

“[It] comes down to demand for steel. We continue to see long-term steel demand risk, particularly in China. The incentive is for supply to lift, and if it lifts aggressively, and you’ve got demand growth that can’t keep up, prices will need to come back.

“We’re certainly in that camp. We think current prices are unsustainably high. On a 12-month view, we would expect those prices to trade lower.”

An iron ore price at $US86 or $US87 a tonne is well above the cost curve and above the price it needs to be to trigger a new investment cycle in iron ore mining, Mr Shaw said. “If the industry starts to believe this price is sustainable, we will see another investment cycle.”

Few expect that to happen. Mr Brennan said he expected iron ore prices to come down in the second half of 2017.

“Global production, particularly from low-cost producers like Australia and Brazil, will grow again in 2017. And the production of steel, which is the main use of iron ore, won’t grow equivalently.”

Source: The Sydney Morning Herald