What goes up must come down
High inventories coupled with new supply and insufficient demand are setting iron ore up for sharp losses in the second half of this year.
Nothing shocked miners, commodity analysts and investors more over the past year than the spectacular surge in iron ore prices, which had reached $94.68 a tonne by late February. Subsequently, traders and mills alike have built up huge inventories over the past 12 months, with little reference to underlying demand growth.

But for all that commodity’s price gains defied predictions in 2016 and early 2017, many analysts now believe that high inventories together with new supply and insufficient demand are setting iron ore up for sharp losses in the second half of this year.
China’s domestic iron ore production jumped 15.3% in January and February as the price rally that began last year extended into 2017, causing imported iron ore to pile up at the ports of the world’s top buyer.
Reuters has calculated that together China’s ports have enough iron ore to construct the Eiffel Tower 13,000 times over. Indeed, China’s ports are bursting with stockpiles of the raw material. Some are even having to demolish old buildings to create more storage space. If iron ore stocks continue to rise, a source told Reuters that all ports in China will reach maximum capacity by early June.
“It is predicted that world iron ore supply will increase by about 50m tonnes. Combined with reduction of Chinese steel industry, it is inevitable to see a downturn of iron ore demand which cannot be compensated by other countries or regions over a short term.”
In an attempt to manage their storage space, some ports have in recent weeks also rejected vessels carrying lower grade iron ore that is less preferred than higher quality material and could take months to clear.
However, key ports for iron ore imports such as Rizhao and Tangshan have enough storage capacity to take in more cargoes, and not turn away from shipments. But taking in further iron ore could be “very dangerous for the price”, according Li Xingchuang, vice chairman at China Iron and Steel Association.
Rise and fall
According to Mr Xingchuang, the global iron ore market faces a prolonged period of oversupply that will drive a sharp fall in iron prices for the rest of this year.
In fact, Mr Xingchuang predicts that iron ore prices could fall to as low as $55 a tonne later this year, due to strong production at the world’s iron ore majors, the continued ramp up of Vale’s big deposit in Brazil and Hancock Prospecting’s Roy Hill mine and the government-ordered closure of some of China’s steelmaking capacity.
“It is predicted that world iron ore supply will increase by about 50m tonnes,” he says. “Combined with reduction of Chinese steel industry, it is inevitable to see a downturn of iron ore demand which cannot be compensated by other countries or regions over a short term. Thus, oversupply will still be the condition of the world iron ore market.”
Mr Xingchuang also predicts that China’s steel demand will fall 1.9% this year, putting even more pressure on iron ore prices as production of the key steelmaking ingredient increases. Steel demand in China, he says, is seen easing to 660m tonnes.
Consequently, Mr Xingchuang says that the oversupply of global iron ore is “very serious” for the long term health of the sector, casting a shadow on the recent run on capesizes.
Shaky future
Mr Xingchuang is not alone in his predictions for the future or iron ore prices. Many miners, analysts and investors have also suggested a shaky future for the material. The consensus among them? Enjoy the iron ore rally while it lasts because it won’t last for much longer. Interest in capesizes may already be waning: the Baltic Capesize Index has tailed off in recent weeks, falling from 2597 at the end of March to 2518 in the first week of April.
Iron ore miner Fortescue has forecast a near-term moderation in iron prices, downplaying the rally that helped to boost profits and lift shareholder payouts. The company told local reporters that while medium-term demand factors in China remained strong, the recent surge in iron ore prices was unusual.
“The price has increased quite significantly and it’s also on the back of increasing stockpiles, which is quite unusual,” said Fortescue’s chief executive Nev Power. “I think we will see it moderate to more historical levels because it just seems to be driven by short-term market right now.”
BHP Billiton’s chief executive Andrew Mackenzie made similar comments recently, whereby he forecast a near-term downside risk for prices of iron ore as well as metallurgical coal.
Rebalancing the market
Added to this, a team of analysts at HSBC went so far as to argue that the price of iron ore may even fall below the cost of production in the second quarter of 2017 in order to clear the massive stockpiles of iron ore in Chinese ports.
“The longer prices remain elevated, the greater the likelihood that marginal supply will be added to the market,” the team said in a briefing note. “Prices may need to fall below the marginal cost of production for an extended period to drive the necessary closures and rebalance the market.
“We do not see economic justification for the iron ore industry to retain excess gains beyond long-term margins while the industry remains in surplus.”
The analysts also suggested that iron ore market fundamentals should force prices lower. These include higher iron ore supply as new operators from India and Brazil’s Vale ramp up production, as well as the growing stockpiles in Chinese ports.
The analysts continue to pin much of the price spike on speculative iron ore trading on the Dalian Commodity exchange, which has caused inventories to rise at a “worrying pace”.
This has caused traders and mills to build up huge inventories in Chinese ports with little reference to underlying demand growth, which is likely to soften this year as the property cycle slows. At some point, this speculative bubble will pop and iron prices will plummet, perhaps by 30% or more, they warn.