Growing glut will put pressure on iron ore prices: analyst

Recent upticks in the price of iron ore will turn out to be shortlived, and the price will likely drop from here, according to an analyst whose contrarian view was aired on Business Insider.

Iron ore investors and producers have been heartened by Monday's surge past $55 per tonne, and the steelmaking ingredient started 2016 with a bang, rallying 30 percent. The decision by Rio Tinto (LSE, NYSE:RIO) to put its massive Simandou project in Guinea on hold put wind in the sails of those who believe the global supply surplus could get crimped and stabilize prices.

That, however, is not the view of Vivek Dhar, a mining and energy analyst at Commonwealth Bank. Dhar cautions that the current trend of a lift in iron ore inventories and a rise in prices "is unusual":

"Higher iron ore inventories normally tend to put pressure on iron ore prices. The deviation in this relationship over the last month is concerning too in that trade and production data suggest heightening surplus risks in iron ore markets.”

The chart below plots the historical relationships between inventories and prices. The current anomaly, of inventories rising with prices, along with other factors, points to a growing glut, states Dhar. These include the fact that China's iron ore imports have increased 9 percent from January to May, while steel production has dropped 1.4 percent during the same period. As well, he notes that higher prices have caused an increase in Chinese iron ore production. Mining.com reported on June 8th that China imported 86.75 million tonnes of iron ore in May, the fourth highest monthly figure on record and the biggest volume this year. Shipments climbed 9.1 percent to 412.15 million tonnes in the first five months of the year and at the current rate could reach the 1 billion tonnes per year mark in 2016 for the first time.

iron ore price and port stocks

“All in all, the data points to another downward correction in iron ore prices,” Dhar tells Business Insider, while forecasting that prices will drop to between $40 and $45 a tonne in the second half.

The downward trend may already have begun. On Thursday iron ore threatened to crash through the $55 support level and wipe out gains from last week, finishing the day at $55.07/tonne.

Dhar of course is not alone in his prediction of another tumble in iron ore prices in H2. Morgan Stanley forecasts an average price of $46 per tonne this year and Citigroup says iron ore will slip to $49. One of the bearest predictions, ironically, for the commodity comes from BHP CEO Andrew Mackenzie, who stated in June that the 2016 rally was not sustainable, adding that iron ore would be one of the commodities to take the longest to stabilize and bringing the market back in balance could take another ten years.

Hat tip: Business Insider Australia