In Commodity News 01/05/2015
Iron ore prices that sank to a decade-low at the start of this month ended up capping the biggest gain in almost two years. A slump on Wednesday and a further loss today signaled the rally may prove to be fleeting.
Ore with 62 percent content at Qingdao tumbled 4.6 percent on Wednesday and fell a further 1.7 percent to $56.18 a dry metric ton on Thursday, according to Metal Bulletin Ltd. Prices are still 9.4 percent higher this month, the biggest increase since July 2013, after surging as much as 27 percent from the low of $47.08 on April 2. They remain 71 percent below the record set in 2011.
Iron ore users, producers and traders are weighing the impact of BHP Billiton Ltd.’s decision to curb the pace of its expansion and the loss of some higher-cost output against weakening demand in China. The commodity’s 30-day volatility jumped this week to the highest level since 2012 after prices entered a bull market, then faltered. The largest U.S. producer said that the seaborne market is doomed amid oversupply.
“We have seen future production plans curtailed and some current production being shut out,” David Lennox, a resource analyst at Fat Prophets in Sydney, said by phone on Thursday. “But there’s still enough in the system with current production to adequately meet demand.”
Demand from China has been lackluster and reached extremely low levels in February, Sanford C. Bernstein & Co. analysts including Paul Gait wrote in a report on Wednesday. Although activity rebounded in March, it’s too soon to call for a recovery in the steel sector, he said.
China Slowdown
Steel use in China fell 6 percent in the first quarter, according to the China Iron & Steel Association. The country accounts for about half of global steel output, and is the largest buyer of seaborne ore. Australia is the top supplier.
“The seaborne market is doomed, is cursed, is a place not to be in,” Cliffs Natural Resources Inc. Chairman Lourenco Goncalves said on an earnings conference call, citing global oversupply led by the largest miners. The Cleveland-based company, the top U.S. producer, also has mines in Western Australia. “I can’t wait to get out of Australia,” he said.
It’s hard to predict how long the challenging pricing environment will continue for some commodities, Rio Chief Group Executive Officer Sam Walsh said in a speech in Seoul on Thursday. Markets don’t follow a smooth, straight line and take time to settle, he said, according to a company statement.
Iron ore’s recent recovery is “mostly fleeting” and the industry should be prepared for weakness in prices in the next few months, Jefferies LLC analyst Christopher LaFemina wrote in a report.
Prices will peak mid-year, Morgan Stanley analysts including Tom Price and Joel Crane wrote in a report on Wednesday. The rally will eventually be capped by more low-cost supply from Rio and BHP, coupled with a seasonal pullback in steel-output rates, they wrote.
BHP and Rio were getting flak about their big output-growth stories, Morgan Stanley said in a separate note. While it’s hard for them to slow or stop huge projects, the next best thing for them to do is alter the longer-term growth strategy, it said.
