Picture: REUTERS
Picture: REUTERS

Singapore — Iron ore has a very tough act to follow in 2017. After surging in 2016 in a rally that caught out many investors, the commodity faces a challenge as supply concerns re-emerge, with Vale bringing on the industry’s biggest project and holdings at China’s ports at a record.

Seaborne supply is expected to remain strong on shipments from Vale’s new S11D project in Brazil, and as miners look to take advantage of prices, said Tan Hui Heng, a Singapore-based analyst at Marex Spectron. That, coupled with slowing demand, could hurt iron ore, he said, joining banks including Morgan Stanley in expecting a retreat. On Tuesday, futures in China sank to the lowest close in eight weeks.

Iron ore soared 81% in 2016 in a year when low-cost supply had been expected to rise further amid tepid consumption, hurting prices. Instead, stimulus in China helped sustain steel output, and that, with speculative interest and record coal prices, fuelled the rally.

Better demand and a more restrained approach by top miners Rio Tinto Group and Vale are likely to carry into 2017, limiting losses, according to Clarksons Platou Securities.

Pricing "should see downward pressure from $80 a tonne" as 2017 "will bring more supply than current pricing can handle", said Jeremy Sussman, an analyst at Clarksons.

Ore with 62% content in Qingdao ended 2016 at $78.87 a dry tonne, just below a two-year high of $83.58 on December 12, according to Metal Bulletin.

The rally supercharged miners’ shares in 2016, with Rio 34% higher in Sydney and Vale more than doubling.

Benchmark prices, which traded below $40 in January 2016, capped a record quarter in the three months to December even as supplies stacked up at China’s ports.

The holdings at ports in the largest buyer surged 22% in 2016 for the biggest annual gain since 2011. In the final week of 2016, they expanded 2.7% to 113.95-million tonnes, according to Shanghai Steelhome Information Technology. That is the highest level on record.

"If history is any precedent, record stocks at Chinese ports carry an ominous sign," said Axiom Capital Management analyst Gordon Johnson and senior associate James Bardowski. Axiom predicts prices will drop to $61 if inventories fall just half as much as in the previous down cycle. Prices should remain at about $70 to $80 in the early part of 2017, with a gradual easing towards $50 to $60 by mid-year, according to Gavin Wendt, founding director at MineLife.

Better demand and a more restrained approach by top miners Rio Tinto Group and Vale are likely to carry into 2017, limiting losses, according to Clarksons Platou Securities

The top four miners, which included BHP Billiton and Fortescue Metals, would probably boost supply by 19-million tonnes in 2018, mostly originating from S11D, while a further jump was expected from mid-tier producers, Macquarie said in December.

The $14bn S11D mine, with first shipments set for January, will produce 90-million tonnes a year at full capacity. In the run-up to the opening, Vale executives said it would take four years to reach maximum output, and that the net gain to company production would be less than 90-million tonnes because of infrastructure constraints.

"The Brazilians … [will] probably [be] replacing some of their high-cost production," said Philip Kirchlechner, director of Iron Ore Research.

Even before S11D gets into its stride, exports from Brazil were running at a record pace. Total shipments in 2016 were about 374-million tonnes, topping the previous annual high of 366-million tonnes in 2015, according to government data.

The Chinese economy will remain critical.


Please sign in or register to comment.