Iron ore's stunning rally faces challenge as supply risks fade

[HONG KONG] Iron ore's stunning rally this year, underpinned by China's demand for the steel-making raw material, risks slowing as miners ramp up output.

The industrial material blasted past US$120 a tonne on Tuesday, propelled by China's stimulus to prop up its pandemic-hit economy and supply disruptions that constrained output of the raw material.

Miners, who have gained from the more than 30 per cent jump in iron ore prices this year, now see the rally as unsustainable. BHP Group expects prices to ease from current levels while volatility remains. That's similar to view of top producer Vale, which said last month it doesn't see support for high prices in the short- to medium-term.

Iron ore demand from mills in China is likely to remain strong, analysts at ING Bank said in a note on Wednesday, adding that uncertainties over Brazilian supply in recent months has also been supportive for the market. "But as these uncertainties subside, we would expect prices to ease," according to the note.

Supply from Brazil, which is in the grip of the coronavirus, has also been gradually picking up with 1.68 million tonnes shipped daily in the first 10 business days of August, an increase from 1.48 million tonnes a day in the 23 business days of July. Exports from Australia's leading port also hit a record July.

China's economic stimulus has raised hopes of a recovery in downstream activity, bolstering the outlook for iron ore demand. Crude steel output topped 90 million tonnes for a third straight month in July, and is on course to breach one billion tonnes this year.

The macroeconomic drivers have been positive for the ferrous market, said Ban Peng, analyst at Maike Futures. However, when the actual demand for steel is revealed as the market enters the peak season in September, the rallies of iron ore and steel may slow down, he said.

Iron ore was trading at US$123.33 a tonne on the Singapore Exchange at 1.11pm local time, the highest in more than six years.

BLOOMBERG