Don't go long on iron ore: Aussie bank

Along with gold and silver, iron ore may be a darling among commodities this year, but don't expect the good times to continue into 2017.

That is according to Westpac Banking Corp., which forecasts the benchmark price to fall below last year's low of $38.30 a tonne. In a note, the Australian bank predicts a rough ride for the steelmaking commodity over the next seven months, due to a perfect storm of weak demand, strong supply and building inventories at Chinese ports. Bloomberg quotes the bank saying that iron ore will fall to an average $47 in the fourth quarter, fizzle out the year at $37, and flatten to $38 a tonne in Q1 2017.

westpac iron ore chart

"The way prices are moving right now, they're not going against that per se, but if you're looking for a bet further out, the thing they are not recommending is that you go too long."

Sitting at around $61 a tonne, iron ore seems to be holding strong amid a Chinese stimulus package, but that stimulus may soon be coming to an end, Citi Bank said last week. Citing the same reasons as Westpac, Citi believes iron ore will average $51 a tonne in the final quarter of the year and $45 in 2017.

Their views are backed by BHP Billiton (ASX, NYSE:BHP) (LON:BLT), the world’s largest mining company and the No.3 iron ore producer, which has repeatedly said prices for the commodity will remain low for at least another ten years due to oversupply.

Bloomberg analyst Joe Deaux said some believe demand for iron ore can sustain itself into 2017, due for example to continued stimulus in China to support economic growth. Another factor is steel exports. If more steel is exported out of China into other markets, that could drive down the price of steel, and along with it iron ore, a key ingredient. Others like Citi see oversupply as the main culprit, citing more production from Vale (NYSE:VALE) and at Roy Hill, the recently-opened mine in Australia that is majority-owned by Gina Rinehart’s Hancock Prospecting.

"The way prices are moving right now, they're not going against that per se, but if you're looking for a bet further out, the thing they are not recommending is that you go too long," Deaux said in a video interview.