Iron ore and steel: A sigh of relief
Iron ore prices rallied following a commitment to support growth by Chinese premier Li Keqiang. We do not believe this is the start of a new uptrend as the market should remain oversupplied against the backdrop of softening demand from China’s steel mills and rising low-cost supplies, writes Carsten Menke, Commodities Research Analyst, Julius Baer
The recent months have been tough for iron ore. Prices dropped almost 40 per cent from the highs reached earlier this year, reflecting renewed fears about a slowdown in demand from China’s steel mills. Although seasonal, cyclical as well as structural factors point to a slowdown in demand due to falling steel consumption, these fears were overdone. There was a sigh of relief in the market yesterday and prices gained more than 5 per cent following statements by Premier Li Keqiang that China will be able to meet its growth target this year while identifying, controlling and resolving financial risks. Despite this commitment to support growth, we still believe that the outlook for steel and iron ore is not very promising. Steel production has reached the seasonal peak, which should lead to falling production over the coming months and weigh on the steel mills’ demand for iron ore. With low-cost supplies from Australia and Brazil growing at the same time, the iron ore market should remain oversupplied as also indicated by rapidly rising Chinese port inventories. Further to that, we believe steel consumption from property construction should soften over the coming months, as various measures to cool the property market should result in reduced activity.