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Iron ore 'disconnected from fundamentals' after huge rally: analysts

Singapore

FIRST, iron ore hit US$100 a ton, then it raced straight to US$110, and now spot prices are well north of US$120: the commodity's rally has been so strong it's triggering warnings that the gains have taken the market beyond fundamental drivers and prices are likely set for a pullback.

"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 steelmaking 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," Mr 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 US$127.15 a ton 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 US$100 this half and average US$95 over the full year, according to Mr Hedborg.

In the futures market, there are signs gains may be excessive. On the Dalian Commodity Exchange, prices have surged more than 75 per cent this year, and the most-active contract's 14-day relative-strength index had held above 70 for the past four days, a figure that suggests the rally may be overdone. On Thursday, futures in both Dalian and Singapore lost more than 4 per cent.

There are also indications that seaborne supplies are picking up, with Mr Hedborg emphasising the restart in Brazil of Anglo American Plc's Minas 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 tons in the second quarter, 8.1 per cent 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 US$80.10 a ton this year and decline to US$61.40 in 2020. Morgan Stanley has predicted a gradual drop back to US$90 a ton in the fourth quarter. BLOOMBERG