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How low can the iron ore price go?

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How low can the iron ore price go?

A quick look at the iron ore price chart is enough to tell you that all is not well. After hitting a multi-year high of US$94.86 in February, the spot price of benchmark 62% fines fell over 4% on Tuesday to US$63.20. And with more supply soon to come on stream, this rout could have further to run.

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The plunge followed another rout in Chinese iron ore futures, as concerns reignite over an ongoing steel glut in China. Chinese steel output in March reached a monthly record of 72 million tonnes, even as Beijing tries to shutter excess capacity in the sector. The previous record of 70.7 million tonnes was set in March 2016, during a period where China stepped aggressively on the stimulus pedal.

Throughout 2016 and into early 2017, strong Chinese steel output was viewed as a positive indicator of rising demand, which drove a surge in steel, iron ore and coking coal prices. However, recent inventory builds of steel and iron ore have stoked fears that Chinese demand, mainly underpinned by infrastructure and property construction, has not kept pace with supply. This glut has occurred even as China posted 6.9% GDP growth for the March quarter, the fastest in six quarters, and accelerating fixed asset investment growth. It also supports earlier reports that Beijing’s claim of cutting 85 million tonnes of steelmaking capacity in 2016 was fake, as the vast majority of mills shuttered were already idle.

The current iron ore oversupply is likely to be further exacerbated by additional seaborne supply that is coming online, with Roy Hill full production and Vale’s S11D mine expected to add over 100 million tonnes of supply in 2018.

Finally, as CBA analysts note, the spike in the price of coking coal coupled with falling steel prices have compressed Chinese steel producers’ margins, further dampening their appetite for iron ore. This confluence of headwinds is likely to keep iron ore prices suppressed for some time, and should continue to pressure the share prices of swing producers.

Daniel Wu is a Research Analyst at Montgomery Global Investment Management. Prior to joining Montgomery in June 2016, Daniel was an analyst in the investment banking divisions of UBS and Goldman Sachs, where he covered the Infrastructure, Utilities, Technology and Media sectors.

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This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564) and may contain general financial advice that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking advice from a financial advisor if necessary.

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