Steel Price Surge Lacks Market Fundamentals

2016-05-15

Iron ore bears including Citigroup Inc. are unconvinced that a record jump in prices amid renewed optimism over China’s economy signals a sustained rebound in the steel-making raw material.

The 19 percent surge Monday came after Chinese policy makers indicated their willingness to bolster economic growth, boosting the outlook for steel and igniting speculation that some investors who’d bet against the market had been caught out. Citigroup said it is still bearish as supply and demand fundamentals remain weak while Axiom Capital Management Inc. said the price jump was probably just a blip.

“The issue is that China is exposed to a global economy whose growth is mediocre at best, and driving domestic demand is becoming more difficult than ever,” Jessica Fung, an analyst at BMO Capital Markets in Toronto, said in e-mail. “I am concerned that this is setting China up for a harder landing down the road, which in turn means a very strong reversal for iron ore prices.”

Iron ore has powered higher in 2016 as steel prices strengthened, undermining forecasts for further losses driven by mounting low-cost supply from Australia and Brazil and weakening demand in China. The pace gathered momentum as Chinese mills began to ramp up output after February’s Lunar New Year break, a tropical cyclone in January disrupted some shipments from Australia and China moved to boost the economy.

Ore with 62 percent content delivered to Qingdao rose to USD 63.74 per dry metric ton on Monday. That was the biggest gain in daily data going back to 2009 and the highest price since June.

“It’s clearly what you would describe as an extreme short-covering event going on,” Wayne Gordon, executive director for commodities and for ex at UBS Wealth Management, told Bloomberg on Tuesday. “To me, the rally is there to be sold, because the fundamentals of the market, being supply and demand, do not stack up to the sharp movements we’ve seen.”

“It is a blip, there is nothing that changed in the overall macro back drop, Gordon Johnson, a New York-based analyst at Axiom Capital said by phone. “Many of the manufacturing data points that in China, it continues to worsen and doesnot get better.”

China’s new phase of growth is underpinned by consumption and services and is inherently less intensive,” BHP’s Western Australian iron ore asset president, Edgar Basto, said in a conference Tuesday in Perth. Overall steel and pig iron production are expected to be subdued in 2016.”

Chinese demand may weaken because of under-investment in real estate and infrastructure while mine supply will remain strong, Citigroup said in a report. The bank kept its price projections unchanged at an average USD 38 per ton in 2016 and USD 35 in2017 and 2018.