Following the crash after March/April's 'mania', Iron ore prices have resurged to 2-month highs on the heels of stimulus-hype and rampant speculation. However, this echo-bubble appears to be bursting as Macquarie sounds the alarm that prices are "getting carried away again" with fundamental support entirely lacking as China inventories soar 30% year-over-year to 20-month highs.
As Bloomberg reports, iron ore was caught up in a speculative rally in China earlier this year as prices soared in April, prompting a host of banks to warn that the surge wouldn’t last, after which rates cratered. Last week, Australia cut its price outlook for 2017 by 20 percent, citing prospects for increased supply just as steel output in China shrinks further. Goldman said recent stimulus in China hadn’t brought a meaningful increase in steel demand, according to a report received on Wednesday.
While speculation about stimulus in China has helped to lift prices, Macquarie said it’s skeptical about fundamental support for the recent move higher, analysts including Ian Roper wrote in a report received on Wednesday. The note asked whether iron ore was "getting carried away again?"
Iron ore holdings at China’s ports just posted the longest run of gains this year, expanding for five straight weeks to 105.4 million metric tons, according to Shanghai Steelhome Information Technology Co. The swelling pile signals robust supplies, and banks including Macquarie warned this month that prices may be set to weaken after rallying 34 percent in 2016.
“The rising port inventory is definitely a dark cloud looming over prices,” said Zhao Chaoyue, an analyst at China Merchants Futures Co.
Furthermore, steel demand in China is shrinking for the first time in a generation as growth slows and the government steers a transition away from a metal-intensive economy reliant on investment to one where services play a bigger role. That’s resulted in the declining sensitivity of steel consumption to credit flows in China, according to Goldman.
“We would need to see ever-accelerating credit growth just to maintain the same level of steel consumption, which is unsustainable and unlikely,” the New York-based bank said in the July 12 report, referring to the country that makes half the world’s steel. "This is at the core of why we expect Chinese steel demand to fall in coming years."
Still as long as the dream of stimulus is still alive, then why question the recent resurgence.
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