Investors are concerned about the current large gap between iron ore prices and steel prices. According to Citi Research, ore prices have dropped even further.
Over the past 2 months, iron ore prices and steel prices have had opposite trends. Specifically, iron ore prices decreased while steel prices increased. This unusual phenomenon also happened in the second quarter of 2015.
The current iron ore price is at 55 USD/ton, down from Citi's calculation of an average of 85 USD/ton in the first quarter of 2017. Meanwhile, iron futures prices at the Shanghai Futures Exchange increased by 30% in the past 2 months.
The increase in steel prices is due to lack of supply after the government implemented a policy of closing inefficient factories. However, Citi believes that the steel shortage is only temporary because the factories' production activities will be enough to meet market demand and offset the deficit left by closed factories.
Furthermore, iron ore reserves in China's ports are likely to peak in the second quarter of 2017 but will not cause a supply squeeze due to falling prices and shrinking credit.
"As a result, iron ore stocks at ports increased sharply but decreased slowly throughout the market cycle." Citi said.
According to Citi estimates, the worldwide supply of iron ore is expected to increase by about 100 million tons, far exceeding the level of 60 million tons in 2016. If so, the iron ore price would have to be at 45 USD. /ton can rebalance the market.
Citi adjusted its forecast for iron ore price movements in the next 12 months with spot iron ore prices falling to 48 USD/ton in the fourth quarter of 2017 and 46 USD in the first quarter of 2018.
According to NDH