Iron ore price rise is 'one last hoorah'
The surge underlines the volatility the world's largest iron ore user imparts on the price. Iron ore slumped at an alarming rate to $US86.70 a tonne in September as Chinese mills trimmed stocks.
Now, anticipating steadier economic conditions in China, the mills are aggressively restocking, pushing the iron ore price more than 80 per cent higher in four months.
But despite the recent surge, Credit Suisse analysts are tipping the price spike to be merely "one last hoorah", with the initial buoyancy this year to give way to a "gradual price fade" toward $US90 by 2015.
It says commodity prices are likely to remain strong for the next few months, but begin to retreat by the second half of the year. The prediction is consistent with a huge expansion of iron ore supply expected in the coming years.
"For this commodity, the long boom is fading," the investment bank said. "However, a steady improvement in Chinese demand - and faint stability elsewhere - have created the conditions for one last run-up in iron ore prices before new supply causes them to ebb back towards our long-run mean.
"The plunge in prices in [the third quarter last year] was short-lived but we still believe it signals a turning point for iron ore, with little prospect of a return to previous cycle peaks," Credit Suisse said.
The bank predicts even higher-cost producers, particularly Chinese private miners, will be forced to close and for China's domestic supply to be cut in half by 2015.
Frequently Asked Questions about this Article…
The surge was driven by a buying spree from Chinese steel mills that aggressively restocked as they anticipated steadier economic conditions in China, pushing the benchmark iron ore price up to US$158.50.
Iron ore jumped to a 15-month high at US$158.50 after slumping to US$86.70 in September — an increase of more than 80% in four months — illustrating the strong volatility tied to shifts in Chinese demand.
Credit Suisse describes the recent spike as "one last hoorah," saying prices should remain strong for the next few months but then gradually fade, with a prediction toward about US$90 by 2015 as new supply comes online.
Yes. The article notes a huge expansion of iron ore supply is expected in coming years, and Credit Suisse says that new supply will cause prices to ebb back toward their long‑run mean.
Credit Suisse predicts higher‑cost producers — particularly Chinese private miners — will be forced to close, and it expects China's domestic supply could be cut in half by 2015.
The benchmark iron ore price increase helped keep the Australian dollar strong, with the article noting it stayed around US105¢ amid the rally.
According to the article, commodity prices are likely to remain strong for the next few months but are expected to begin retreating by the second half of the year.
The article highlights that iron ore prices can swing sharply with Chinese demand, the current rally may be temporary according to Credit Suisse, and an expected expansion in supply — plus closures among higher‑cost producers — could push prices lower over the medium term. Investors should note the market's volatility and the role of Chinese restocking and future supply in driving prices.
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