Since Christmas, the spot price of iron ore – a key steelmaking ingredient – has risen over 5% and prompted share prices in big miners Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) to rebound strongly.
Suspected to be the result of the Chinese government's intention to speed up around $US1.1 trillion worth of infrastructure spending in 2015, and a restocking of steel mills, some analysts have said they expect the low point for iron ore has been reached.
"Current prices of around $US65 to $US75 a ton could prove to be a low point for iron ore," chief Australia economist at HSBC Holdings, Paul Bloxham, was reported as saying in The Australian Financial Review yesterday.
However, major iron ore producers are ramping up their output, despite the sector already being in surplus. Investment bank Goldman Sachs believes the global iron ore surplus could hit 300 million tonnes by 2017.
And whilst iron ore supply is increasing, China's property market – which accounts for 24% of global steel consumption according to Moody's – is also believed to be massively oversupplied. In total China accounts for 67% of steel imports, according to the Bureau of Resources and Energy Economics (BREE). A decline in demand for steel (and hence iron ore) appears very likely.
So it's little wonder many analysts are predicting lower iron ore prices in the future.
Indeed the Australian government recently downgraded it prediction on the price of iron ore to $US60 per tonne, roughly in-line with analysts. Whilst BREE expects prices to rebound in the second half of 2015, a rally would rely heavily on improving activity in the Chinese housing sector – something which is not as easy to forecast.
Investors would be advised to keep well away from the smaller iron ore miners including Arrium Limited (ASX: ARI), Atlas Iron Limited (ASX: AGO), BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX). Whilst Rio Tinto and Fortescue may also appear cheap and could rally in the short-term, the medium-term outlook for iron ore does not look good. More pain could be in store for shareholders.
