Commodity Strategy - Iron Ore: Prices To Retreat By H217 - FEB 2017

BMI View: Iron Ore prices will be elevated in the coming weeks as speculative activity reigns the markets due to positive investor sentiments on China's infrastructure plans. Prices will retreat by H217 as China's cooling property market outweighs demand from infrastructure investment and additional supplies from projects coming online flood the oversupplied seaborne market.

Iron ore prices will remain elevated in the coming months as speculative activity from positive investor sentiment on the Chinese infrastructure sector rolls on. On January 4 2017, the Chinese government announced a USD115bn railway construction plan for 2017, an almost identical budget to that of 2016, that will create significant demand for base metals despite a slowing economy. The country plans to add 2,100 kilometres of railway track in 2017, mostly in its central and western regions, and electrify 4,000 kilometres of railways.

The price of iron ore with 62 percent content in Qingdao port hit a two-year high of USD83.58/tonne in December 2016. Used in steelmaking, the ore averaged USD58.32/tonne in 2016 after 3 to 4 years of losses as government stimulus in China's housing sector in H116 boosted demand for metals used in construction. We expect fiscal support from the government to continue to provide support to metals demand in 2017 as public infrastructure spending increases. Over the coming weeks, Chinese fiscal support to the infrastructure sector will sustain steel output, and that, along with speculative interest will continue supporting iron ore prices, although further upside will be limited as demand expectations for 2017 are mostly priced in and stocks are elevated. Iron ore inventories in China rose to an all time high of 113.95 million tonnes at the end of 2016. By H217, iron ore prices will retreat given high stock levels and additional supply coming online, especially from Brazil where Vale has just started commercial production at the new S11D mine, (see: ' Iron Ore: Chinese Stimulus To Support Ore Demand' , October 31 , 2016). Simultaneously, China's property market cooling will outweigh investment into public infrastructure, reducing demand and thus prices of iron ore.

Price To Stay Elevated In Coming Weeks
Prices Of Iron Ore (62% Fe content) At Qingdao Port (USD/tonne)
Source: Bloomberg, BMI

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