WB raises iron ore forecasts after China-led rally

Bloomberg

Iron ore forecasts for the five years through 2020 have been revised higher by the World Bank after the commodity rallied in the first quarter on a surge in steel prices in China, the largest user.
The raw material is expected to trade at $50 a metric ton this year, $51.50 in 2017 and extend gains to $56.20 by 2020, the lender said in its latest quarterly commodities outlook. That compares with forecasts of $42 for this year, $44.10 in 2017 and $51 by 2020, according to the bank’s report in January, when it said it expected iron ore to post the biggest loss among metals this year.
Iron ore soared “in February-March on a spike in steel prices and restocking at Chinese mills ahead of the construction season” the bank said. “In addition, there were some disruptions to iron ore seaborne supply, which further tightened the market. Prices continued to rally in April driven by renewed growth prospects in China.”
The commodity’s turnabout in 2016, which has also been driven by a surge in speculative trading in China’s futures markets, has caught many analysts forecasting a fourth year of losses off guard. Prices have rallied as mills in China pushed steel output to a record in March amid a property rebound and additional stimulus, boosting miners’ shares. While it raised its price forecasts, the Washington-based bank still warned supplies will go on increasing.

‘Further Closure’
“Significant volumes of low-cost capacity are expected over the next two-to-three years, while high-cost capacity is being shut down,” the bank said. “Further closure of high-cost capacity is required to balance the market.” Ore with 62 percent content delivered to Qingdao was at $62.78 a dry ton on Tuesday, according to Metal Bulletin Ltd. Iron ore’s 44 percent gain this year has surpassed the advances in base metals including zinc and copper.
Some bears are sticking to their guns even after the advance. Goldman Sachs Group Inc. has said the current rally is unsustainable, forecasting prices will probably slump to $35 a ton by the end of 2016. Morningstar Inc. said in a summary of a note that it saw prices at $35 next year.
“Renewed optimism about Chinese steel demand and recovering commodity prices have driven share prices for many miners to unsustainably high valuations,” Morningstar said. “We expect falling Chinese steel demand and rising Chinese steel scrap availability to cut iron ore prices by half,”

Property Market
Iron ore and steel have risen after policy makers in China presided over a revival in the property market. Home sales jumped 71 percent in March, and investment in real-estate development rose in the first quarter. While bigger centers such as Shanghai, known as tier-one cities, have now taken steps to cool red-hot markets, smaller cities still have too many empty homes.
“If the outlook for tier 3-and-below cities improves, steel demand will pick up even further,” Morgan Stanley analysts including Joel Crane and Tom Price said in a report on Wednesday. “In this scenario, we would expect upside risk to steel demand and production, and thus iron ore prices.”
Iron’s rally has benefited miners’ shares. In Sydney, Rio Tinto Group has risen 8.3 percent this year, while BHP Billiton Ltd. added 10 percent and Fortescue Metals Group Ltd. gained 64 percent. The trio are Australia’s top shippers.