Morgan Stanley: Iron ore will drop to $35 by fall

After a rocky start to the month the Northern China benchmark iron ore price has now built a solid base above the $50 per dry metric tonne level.

The import price of 62% Fe content ore at the port of Tianjin gained for the third day in a row to trade at $53.40 per dry metric tonne according to data supplied by The Steel Index.

The price of iron ore is down sharply since trading within shouting distance of the $70 mark in mid-April but is back in bull territory for 2016 with a 24.5% rise since the beginning of the year and a 44% rebound since hitting near-decade lows in December.

Year to date iron ore is averaging $51.50, which implies Morgan Stanley sees iron ore below its December low of $37 a tonne in the fourth quarter

Analysts at Morgan Stanley became the latest to upgrade their outlook for iron ore, although forecasts for the rest of the year still call for a steep decline in the price from current levels.

A "reasonable trading range" during March to September is $45 to $55 a tonne, analysts including Tom Price was quoted by Bloomberg as saying adding that world number two and three producers Rio Tinto and BHP Billiton are “adjusting” the addition of new supply to "accommodate weaker market conditions."

Further out predictions are much less optimistic as continued oversupply drags down the price. Morgan Stanley forecasts a glut of 33 million tonnes this year and nearly 100 million tonnes by 2018. The investment bank sees an average price of $46 a tonne this year (a 17% increase over its previous estimate) and $42 a tonne next year.

Year to date iron ore is averaging $51.50, which implies Morgan Stanley sees iron ore averaging below its December low of $37 a tonne during the final quarter.

Analysts at Citigroup recently upgraded their forecasts for iron saying Chinese demand may "surprise to the upside", but the investment bank still expects a decline to an average of $49 a tonne this year and $42 next year before falling to $38 in 2018. Previously Citigroup predicted a retreat to below $40 as soon as the end of this year.

Analysts are not alone in predicting a slump. BHP CEO Andrew Mackenzie said last week the 2016 rally simply 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.

Morgan Stanley: Iron ore will drop to $35 by fall