Will the Iron Ore Price Stay above US$60?

The Iron ore price soared on Monday. The metal jumped by 3.6%, trading above US$60 a tonne. Last night, iron ore experienced another small rally, up 4.1% to US$62.85. Yesterday’s rally gives iron ore a 44% gain for the year.

iron ore index 20Apr16

Source: Business Insider Australia

Why did this happen?

China is depleting its inventories. Prices have surprised most analysts, as steelmakers in China resurrected output to record levels last month. Policymakers are bolstering growth in the property sector, which means more steel is needed.

China’s inventories of alloy are also depleting which is pushing up domestic prices and boosting incentives to increase supply. However, this may quickly become a problem. It’s logical to think that if steelmakers in China rapidly increase supply they will soon exceed demand.

So while the iron ore price might be enjoying a nice ride for the moment, things could quickly change. Citigroup still believes global iron ore faces a serious supply problem. They said in a report early this week that commodity gains could reverse in the second half of this year.

It’s not just steelmakers that are ramping up supply; miners are doing the same. Iron ore supply has saturated the market. And miners like BHP Billiton [ASX:BHP] and Rio Tinto [ASX:RIO] don’t seem to be letting up.

On Tuesday, Rio revealed figures for first quarter iron ore production activity. And, instead of reducing production, Rio raised it by 13%, to 84 million tonnes, compared to the corresponding period. Fortescue Metals Group [ASX:FMG] also increased its quarterly shipments by 6%. The miner stated that it may beat its full-year export guidance.

Meanwhile, BHP released their export data today, in which their March iron ore production had decreased 10% compared to the prior corresponding period. I believe BHP had every intention of increasing production. But they were severely hamstrung by the suspended operations at Samarco.

Having spread all this doom and gloom, I wouldn’t count out iron ore just yet. This year it was predicted that iron would recede and remain below US$45 a tonne. Yet this hasn’t happen. But if China’s property market can weather the economic downturn, Chinese steelmakers might still be happy to increase production. That could keep iron ore at a relatively higher level than we have previously seen.

Härje Ronngard,
Junior Analyst, Money Morning              

 

PS: Mining stocks are still struggling amid their tremendous falls over the past few years. BHP is down more than 57% over the past five years. At this point in time, it seems like some miners can’t go any lower.

This might not necessarily be bad news. It just means there are some potentially decent mining stocks out there trading at massive discounts.

According to Money Morning’s resource specialist, Jason Stevenson, there are 10 great miners in the market right now. Jason has written a report all about it, ‘The Top 10 Australian Mining Stocks for 2016’. In his report, Jason will show you why now might be the ideal time to invest in mining stocks.

To get a free copy of Jason’s report, click here.


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