Barclays says iron ore price may still rise, but will settle lower

Barclays thinks there is fundamental support for higher iron ore prices over the immediate term, but not over the long term.

"While we maintain our forecast for iron ore prices to average US$55/t 62%-Fe Qingdao, we do think that the recent strengthening in the benchmark iron ore price has some room to run before converging to our relatively bearish forecast," the UK-lender said in a research report on Monday.

The iron ore price rose to US$64.05/t on Monday, up US$1.25 from the previous session, according to Metal Bulletin. So far this year, the highest the commodity has reached was US$94.9/t, in February.

According to Barclays, Chinese steel inventories are declining, despite high levels of production (72Mt in May).

"The decline in steel inventories, coupled with the recent plan to eliminate substandard steel, has fuelled a narrative of tightness in supply, resulting in high benchmark steel prices. Couple this with high profitability readings, this has resulted in the market returning to the dynamics seen in 1Q17, favouring yield of cost. The preference for higher-quality ores, despite elevated port stocks, has driven up the benchmark iron ore price."

However, Barclays do not think that such a situation is sustainable.

"As we head deeper into the summer months, we expect the Chinese economy to slow (as tighter credit conditions take hold), dampening steel demand and causing a decline in steel industry profitability. As steel industry profitability declines, we expect the high port stock levels to again become a factor in sending iron ore prices lower," the report said.

PORT STOCKS

Iron ore port inventories have fallen by approximately 3mnt in late-June/early-July, reaching 142Mt. Mirroring the decline in iron ore inventories has been a decline in steel product inventories.

"Steel product inventories have fallen by 2.2% week-on-week at the end of June, marking the 19th consecutive week of product declines," Barclays said, citing data from MySteel.

Meanwhile, steel industry profitability remains high, as steel prices launch sustained recovery.

The industry-wide survey of steel profitability remains elevated at an estimated 83% of producers reporting profitability. The strong readings are being driven by elevated rebar prices and recovering hot-rolled coils (HRC) prices, the report said.