Iron Ore Rally Enters Bull Market as China Rebuilds Inventories
Comment of the Day

July 26 2013

Commentary by Eoin Treacy

Iron Ore Rally Enters Bull Market as China Rebuilds Inventories

This article by Phoebe Sedgman for Bloomberg may be of interest to subscribers. Here is a section
Citigroup forecasts that prices will average $115 a ton this half, while Macquarie Group Ltd. expects an average of $120. In the first six months, ore averaged $136.97. Australia & New Zealand Banking Group Ltd. said in a July 16 report that the third quarter tends to be seasonally weak for iron ore demand.

A repeat of the slump last September, when ore fell to a three-year low of $86.70, is unlikely this year amid low inventories at steel mills and ports in China, according to Morgan Stanley. Prices will average $128 a ton this quarter and $125 in the final three months, it says.

The global seaborne market will swing from a deficit of 91.5 million tons this year to a surplus of 8.8 million tons in 2014, increasing to 69.1 million tons in 2015 and 152 million tons in 2017, according to a Morgan Stanley report on June 25. Iron ore is the biggest seaborne cargo after oil.

Eoin Treacy's view The oligarchy that dominates the global iron-ore market have been boosting supply as new production came on line following major investment. This stands in sharp contrast to their attitude early last decade when they attempted to support prices by withholding supply. China's efforts to curtail excess capacity in steel represents a headwind for the sector over the medium-term but there is potential for upside in the short-term as inventories are replenished.

BHP Billiton and Rio Tinto have both bounced from the lower side of their respective ranges but will need to hold above their late June lows if potential for some additional higher to lateral ranging is to remain credible. VALE is unwinding its short-term oversold condition relative to the 200-day MA but would need to break the progression of lower rally highs to question the consistency of the medium-term downtrend.

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