Iron ore prices `disconnected from fundamentals’ after huge rally

First, iron ore hit $100 a tonne , then it raced straight on to $110, and now spot prices are trading well north of $120. The commodity’s rally has been so strong its triggering warnings that the gains have taken the market beyond fundamental drivers and prices are likely primed for a pull-back.

Prices are disconnected from fundamentals at the moment, CRU Group Senior Analyst Erik Hedborg said in an interview from London, citing improving global supply and expectations that mainland steel consumption may soften. We are rather bearish on Chinese steel demand for the second half.

Iron ore has skyrocketed this year, hitting the highest level in more than five years, after a dam disaster at Brazil’s Vale SA and bad weather in Australia curtailed shipments just as Chinese demand expanded. The steel-making material made another dash higher in recent weeks after Australian miner Rio Tinto Group cut output guidance again following operational problems. The ascent has spurred concerns the advance may prove to be unsustainable.

Supply is looking pretty decent, with the exception of Rio, Hedborg said. Exports from Australia in June should be strong as some miners ramp up in the last month of their financial year, he said. In Brazil, Vale has also restarted its Brucutu mine, a major operation that was suspended after the dam collapse.

Benchmark spot ore hit $127.15 a tonne on Wednesday, the highest since 2014, according to Mysteel Global. Prices have risen for the past six days, the best run since 2017, after surging 18 per cent in June. They are expected to hold near $100 this half and average $95 over the full year, according to Hedborg.

Rally in Dalian

In the futures market, there are signs gains may be excessive. On the Dalian Commodity Exchange, prices have surged more than 80 per cent this year, and the most-active contracts 14-day relative-strength index has been above 70 for the past five days, a figure that suggests the rally may be overdone.

There are also indications that seaborne supplies are picking up, with Hedborg emphasizing the restart in Brazil of Anglo American Plcs Mina’s Rio operation, which had been shuttered for most of last year after two pipeline leaks.

Top miners including BHP Group are estimated to have shipped 285.5 million tonnes in the second quarter, 8.1% up from the January-to-March period, according to Sanford C. Bernstein & Co., which tracks vessels. In Australia, exports from Port Hedland -- the main maritime gateway in the top shipper -- set a record in May for that month. June figures are due in the coming days.

Other forecasters have flagged expectations for a softening of prices this half and into 2020. In its latest global market outlook, Australia’s Department of Industry, Innovation and Science forecast that free-on-board prices would average $80.10 a tonne this year and decline to $61.40 in 2020. Morgan Stanley has predicted a gradual drop back to $90 a tonne in the fourth quarter.

The price now is very, very high, said Hedborg.

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