Iron ore rally: Stronger fundamentals or speculation and hype?

In a note to clients, British bank Barclays said the rally in iron ore prices on the international market stalled last week but that prices have tended to hold their ground.

The TSI 62%-Fe iron ore benchmark closed at US$78.40/t on Monday after peaking at US$80.83/t on November 28, the first time it has been above the US$80/t mark since 2014. Prices hit a record low of US$38.30/t in December 2015.

Barclays sees iron ore benefiting from a China that is defying expectations, with the nation's PMI moving further in expansionary territory.

"As long as Chinese demand remains healthy, the risk of a sudden and rapid reversal in the short term remains low," the lender said.

Barclays believes that the recent rally in metals is built partially on improved fundamentals and partially on speculation and hype. As such, while the outlook for commodities like copper and iron ore has improved relative to the lows witnessed in the early part of the year, fundamentals have not improved to justify current spot price levels.

"Both metals remain highly leveraged to the performance of the Chinese economy, and any signs of a slowdown there could be the catalyst to send prices lower. On balance, we expect prices for copper and iron ore to ease off of current levels throughout 2017 as the Chinese economy cools and several stimulus measures wear off," it said.

"However, for the first time this decade, a compelling argument can be made that the end of the bear market is at hand. If the Chinese economy can convert the stimulus-induced bounce of 2016 into self-sustaining growth, then the recent rally could have legs, resulting in metals truly made great again," Barclays added.

CREDIT SUISSE

Credit Suisse said last week was a mixed one for commodity prices and said mining equities saw some retracement after the strong previous weeks.

"Ex-oil, iron ore was the best performer up ~2% and port inventory rose 1Mt to ~104Mt," the Swiss bank said in a research report on Monday.

Stockpiles have now risen by 6.6Mt in the last eight weeks and are up over 16Mt year-on-year, according to a report on Monday from shipbrokers Simpson, Spence and Young.

POSITIVE SENTIMENT

Brazilian iron ore giant Vale's CEO Murilo Ferreira believes there is now a positive sentiment regarding business confidence in Asia and that the economic scenario is significantly better than what some pessimists had predicted for 2016.

Ferreira had said in October that international iron ore prices would remain stable during the rest of this year and in 2017.

"When we reported out first quarter results, I said I had noticed a much better market... and I see price stability for the end of 2016 and 2017," Reuters quoted Ferreira as saying at the time.