Iron ore prices are up again as the steel price has risen and the market enters a traditional peak period.
This means the iron ore rally could have a bit more juice in it yet. This will likely tie into the future share price of Fortescue Metals Group Ltd [ASX:FMG] as it is a pure play iron-ore producer.
But a pullback in price could occur in the medium-term.
As per Metal Bulletin via Business Insider; 62% fines are up 0.6% to $87.61, 58% fines are also up 0.5% while 65% fines are up a significant 1.4% to $99.70.
Steel capacity reigned in, iron ore responds
On Thursday, the Communist Party head of Hebei province announced that it will cut annual steelmaking capacity in 2019 and 2020 by 14 million tonnes per year.
The move, which will involve shuttering old and inefficient plants, gave the most active steel rebar contracts on the Shanghai Futures Exchange a lift of 1.1% after falling earlier in the day.
This evidently had flow on effects to iron ore spot prices.
It also coincided with the extension of industrial production curbs in Tangshan, the capital of Hebei.
Analyst Richard Lu of CRU in Beijing said, the previous drop was a, ‘a reflection of the “weak-demand, high-output” situation,’ Reuters reports.
However, despite these factors, a cap on the iron ore rally could be on the horizon in the mid-term as investors may have already priced in much of the impact of the Vale mining disaster.
Benchmark iron ore to drop to $60?
According to HSBC’s metals and mining equity team via Business Insider, ‘Iron ore prices have overreacted to small supply disruptions,’ and they ‘expect spot prices to correct materially towards the $60s over the medium-term.’
How long is the medium-term?
Hard to say given the number of factors at play. It could be in the three- to four-month timeframe, because it’s about $20 off the HSBC range for now.
Relevant factors are that China has finally announced tax cuts and further infrastructure spending, and the fact that March is usually a period of peak demand for steel.
We’ve written recently how the higher grades of iron ore may be more resistant to the pullback, and it is worth noting that Fortescue Metals Group’s flagship product, the Fortescue Blend, sits at 58.3% Fe.
This is a breakdown of its 1H19 Product mix:
A few things to consider.
For Money Morning