Iron ore is one of the top performing assets this year, with futures on China's Dalian Commodity Exchange surging by more than 30%, fuelled by the country's economic recovery from coronavirus turmoil.The spot price of benchmark 62% iron ore hit a 13-month high of $126.50 a tonne this week.
Strong demand for steel as China unleashed stimulus programmes has ramped up consumption of raw materials, but the price gains are now vulnerable to rising ore shipments, analysts said.
Speculators fuel both iron ore futures and Chinese stocks https://fingfx.thomsonreuters.com/gfx/mkt/xlbpglrxzvq/Speculators%20Fuel%20Both%20Iron%20Ore%20Futures%20and%20Chinese%20Stocks.png
China is both the world's top consumer and producer of steel and is the biggest iron ore buyer.
"The iron ore price is highly correlated to stock markets these days, very much dominated by the paper trading moves, so I'd say there is already a bit of a disconnect between the fundamentals and price," said Ian Roper, general manager at Shanghai Metals Market.
"At some point we'd imagine that the fundamentals will reassert themselves."
Iron Ore Port Inventories in China Rebound
Problems in Brazil, the world's second biggest producer, due to weather and the pandemic, had curtailed supply, but Chinese iron ore imports touched record highs in July and Brazilian shipments are due to rise.
"We expect fundamentals to weaken in 2H as more supply from Brazil enters the market," UBS analyst Myles Allsop said in a note.
Iron Ore Shipments from Brazil Rebound https://graphics.reuters.com/IRONORE-OUTLOOK/xlbpgbqlqvq/chart.png
Rising supply is also evident in Chinese port inventories, which have recovered in recent weeks to about 113 million tonnes after sliding in June to the lowest levels in 43 months. Heavy rain, virus cases among ship crew and import hurdles have made it difficult to deliver ore from vessels to steelmakers, said Erik Hedborg, senior analyst at consultancy CRU.
"If the disruptions are solved, we will see iron ore prices quickly go back below $100 per tonne in the next few months," he said.
China Steel Output Resilient During Pandemic https://graphics.reuters.com/IRONORE-OUTLOOK/xegvbokljpq/chart.png
Demand also may be muted during the second half as China is due to become a net importer of steel this year, for the first time since 2009, mainly due to cheaper prices abroad, Roper added.
By Eric Onstad