Iron ore prices have softened in the past few days to about $81.50/tonne but for some forecasters this is still considerably overvalued.
SA’s bellwether iron ore producer is Kumba Iron Ore, which has gained 400% to R171 since January, considerably outstripping the 107% appreciation in benchmark iron ore prices. Kumba produces a high-grade iron ore product.
In its latest Commodities Comment, investment bank Macquarie said fundamentals did not justify current iron ore prices of $60-$83/tonne. In the current quarter the price was likely to average $65/tonne, its highest level in two years, despite abundant supply of all but some higher-grade units.
Macquarie has revised upwards its projections for iron ore demand next year, based on strong Chinese demand and a better outlook for demand outside China. But it said prices above $60/tonne incentivised more production. It said Chinese steel consumption was likely to contract late next year, although it would be strong in the first half. Macquarie expects iron ore prices will decline to $50-60/tonne next year.
Investec’s global mining team said forecasts that iron ore and metallurgical coal prices could collapse later next year could prove wide of the mark. China’s latest campaign to shut some induction furnaces making steel from scrap metal could stimulate production from blast furnaces, which need iron ore and coking coal.
"China’s direct actions proved to be the saviour of large swathes of the mining industry in 2016 and ongoing control such as this continue to provide a fillip," Investec said.
In its latest commodities update, Capital Economics said the recent surge in industrial metals prices might reflect expectations that the US Federal Reserve’s interest rate hikes were responding to a stronger US economy, which was positive for global growth. US interest rates were coming off an extremely low level and, even with another three 0.25 basis point hikes expected next year, would remain low.
The appreciation in industrial metals ran counter to the stronger dollar, Capital Economics said.
Metals are priced in dollars, so a strong dollar can restrict demand.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.