Iron ore prices could halve: Evans analyst Andrew Hines
Analyst Andrew Hines says the pullback in the iron ore prices could exceed expectations.
Iron ore price
Iron ore is “on the verge of a multi-year bear market” and the price of the commodity could halve in the coming months.
That is the view of Evans & Partners analyst Andrew Hines, who warned clients that iron ore prices could eventually drop back towards its historical average of about $US33 a tonne.
Iron ore prices have rallied sharply over the past year to more than $US90 a tonne, delivering a surge in profitability at local producers Rio Tinto, BHP Billiton and Fortescue Metals Group.
“In our view, iron ore is on the verge of a multi-year bear market, and the current price spike is only going to make things worse,” Mr Hines said.
“Iron ore is a bulk commodity, it is relatively abundant, and it is not difficult to mine or process. Iron ore producers should not expect to make supernormal returns in perpetuity.”
The bleak commentary contrasts with the recent decisions from the likes of Credit Suisse and UBS to significantly upgrade their short-term and medium-term iron ore price forecasts.
Credit Suisse earlier this week lifted its 2017 iron ore price forecast from $US55 a tonne to $US78 a tonne, prompting it to unveil a wave of forecast earnings upgrades across the iron ore sector.
Similarly, UBS upgraded its 2017 iron ore price forecast by 27 per cent to $US71 a tonne.
Those upgrades came amid renewed overtures from Chinese authorities that it would step up efforts to rationalise its steel industry. The government said over the weekend that it would look to cut about 50 million tonnes a year of steel production.
Mr Hines said that while the market was pricing a fall in iron ore prices into the shares of Australia’s iron ore miners, the pullback was likely to exceed expectations.
He said BHP, Rio and Fortescue shares were factoring in an iron ore spot price of about $US60-$US65 a tonne, whereas he expected iron ore to fall to $US45 a tonne in the second half of this year.
That trio would suffer “much lower share prices” by midyear should those forecasts prove accurate.
The recent resurgence in iron ore was likely to encourage additional sources of supply into the market, he said, noting the recent overtures about new projects from small Pilbara producer Atlas Iron and Vedanta Resources flagging an increase in Indian production.
“There are rational reasons why the price has spiked — it is not just irrational iron ore traders and taxi drivers in Dalian punting on commodities — but these reasons are largely short term,” Mr Hines said.
“A problem for the long term is that the longer the iron ore price stays at elevated levels, the more likely it will encourage high-cost producers into the market, and the further the price will need to fall before equilibrium is reached again.”
Australia’s iron ore miners had a comparatively poor day yesterday, although Fortescue closed 1.1 per cent higher to $6.54. BHP (1 per cent) and Rio (0.8 per cent) both fell, while smaller producers Atlas (8.6 per cent) and Mount Gibson Iron (7.3 per cent) fell sharply.
PS. I wonder if this counts as a source, or as fear mongering?
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