Iron ore’s 24% surge is set to fade, McKinsey warns

Bloomberg

Iron ore will probably snap back to $45 a metric ton as a nascent real-estate rebound in China won’t bolster construction demand in the world’s biggest user and supplies remain plentiful, according to McKinsey & Co.
The commodity will trade between $45 and $50 a ton this year, eroding a first-quarter rally to as high as $63.74 that was spurred by speculation demand growth will rise, Oliver Ramsbottom, a Tokyo-based partner, said in an interview. There’s no real improvement in Chinese steel consumption, said Ramsbottom, who’s covered commodities for almost two decades.
Iron ore’s 24 percent surge this quarter has surprised many forecasters who’d expected a fourth year of losses driven by sinking steel demand in China and rising low-cost supply. The rebound hasn’t swayed many skeptics, with banks including Goldman Sachs Group Inc. reiterating bearish forecasts. McKinsey’s view that iron ore gains will probably prove transient came as one of China’s largest mills warned that the global steel industry’s crisis has become so severe that it’s comparable to a new “Ice Age”.
“There’s plenty of supply, there’s relatively weak downstream demand and sure, you get some uplift in price, but it’s not really that significant,” said Ramsbottom. “There’s little reason that iron ore is going to go above $45-to-$50 per ton. If anything, there’s probably more downside risks.”

Goldman’s Target
Ore with 62 percent content in Qingdao fell 1.7 percent to $54.18 a dry ton, dropping for a sixth day, according to Metal Bulletin Ltd. Prices, which posted a record one-day gain on March 7, are still set for their biggest quarterly advance since December 2012.
Goldman Sachs has a year-end target of $35 a ton, while Citigroup Inc. projects an average of $38 for 2016 and $35 for 2017 and 2018. Futures in Asia on Thursday signaled losses in the Metal Bulletin price, with the contract in Dalian dropping as much as 1.9 percent. “With iron ore, we see it sitting where it is for a little while longer,” Tony Ottaviano, vice president strategy, development and planning at BHP Billiton Ltd., said at an industry event in Perth on Thursday, adding it made sense for the miner to maximize output. “When you see the Ebitda margins we make, I cannot understand why we wouldn’t operate these assets to their full value, maximize every bit of production we can.”

Home Prices
Iron ore’s first-quarter gain has come as data showed China’s home prices climbed in the most cities since March 2014 and steel prices rallied. Policy makers have signaled that they’re prepared to bolster the weakest economic growth in a quarter century. While the country started easing property curbs in 2014, the measures have helped to lift prices in the biggest centers, without yet easing a glut of unsold homes in smaller cities.
“You still have oversupply, certainly residential in the third- and fourth-tier cities,” said Ramsbottom, who lived in China for about 15 years. “If the government continues to say ‘OK, we’re not going to resort to increasing credit and allowing real-estate developers to start building again’,” then iron ore demand and prices will be hurt, he said.
Infrastructure and construction account for about half of China’s steel consumption, Bloomberg Intelligence estimates. As the country seeks to transition away from investment toward consumption-led growth, steel demand will contract 3 percent in 2016 after shrinking 5.4 percent last year, according to the China Iron & Steel Association.