Iron ore price jumps to 8-week high

Physical markets, not just futures speculation behind the latest rally

iron ore price jumps to 8-week high

The Northern China import price of 62% Fe content ore gained 2.3% on Tuesday to trade at $62.90 per dry metric tonne according to data supplied by The Steel Index. The price of the steelmaking raw material is now up more than 18% from year lows hit two weeks ago.

Some of the strength on iron ore markets are the result of speculation in futures ahead of the end of the quarter, but combined daily volumes on the main physical iron ore trading platforms in China and Singapore also reached its highest this year on Thurday,  reports Reuters:

"We're not expecting to see a full-blown rally from here, but something in the low $60s looks reasonable over the next few months," said Daniel Hynes, commodity strategist at ANZ.

Something in the low $60s looks reasonable over the next few months

A worry for the industry remains global oversupply and stockpiles at Chinese ports remaining at record highs. Stocks of iron ore at China's ports topped 141 million tonnes last week, the highest since 2004 according to Reuters:

"While demand is strong, supply is also strong," said a trader in Beijing who last bought cargoes two weeks ago. "We're very cautious about rising prices."

Growing surplus

Iron ore's rally goes counter to what most analysts believe is in store for the market which has been in oversupply for more than two years.

Morgan Stanley this week sharply cut its forecast for the iron ore price in the third quarter with the investment bank now seeing an average of $50 over the period, climbing to $55 in the final three months. For the year as a whole Morgan Stanley sees the commodity averaging $63 compared to a year-to-date average of $74.  Iron ore is expected to continue to soften averaging $58 next year and $54 in 2019.

The latest forecast from the Morgan Stanley is more optimistic than predictions in a research note Citigroup released last week.  The bank lowered its price outlook by a fifth saying iron ore will average $48 a tonne in Q4 2017, down from $60 in its previous prediction:

Both analysis blame growing global supply  – most notably from Vale's S11D mine and Roy Hill in Australia hitting full production – for the weak outlook. According to Citigroup, 2017 will see a surplus of 118m tonnes following a more than 60m tonnes glut last year. Morgan Stanley predicts nearly 40m tonnes of oversupply this year, growing steadily to top 120m tonnes in 2019 and 185m excess tonnes in 2021.