UBS commodities analyst Daniel Morgan thinks the current iron ore price rally is unsustainable.
"The price at the moment is above a sustainable medium-term price. If this price was seen as any way sustainable, you'd get suppliers lifting production," he has told Fairfax Media.
He added, "A lot of the marginal tonnes which have left this market, let's call it around 200 million tonnes of high-cost suppliers that have exited in the last two years, if this price was to be anyway sustained I'm sure they'd re-enter the trade, but they haven't."
It's been good news for Australia's iron ore miners, with their share prices surging.
Atlas Iron Limited (ASX: AGO) has seen its share price double in just a week, BC Iron Limited (ASX: BCI) is up 55% over the past five trading days, Grange Resources Limited (ASX: GRR) is up 27% over the same period, Fortescue Metals Group Limited (ASX: FMG) is up nearly 16%, and Rio Tinto Limited (ASX: RIO) is up more than 10%.
Mount Gibson Iron Ltd (ASX: MGX) and Mineral Resources Limited (ASX: MIN) have seen their share prices rise 20% and 10% respectively in the past week too.
Since October 24, the iron ore price has surged 35% from US$59 a tonne to US$79.81 on Friday. That has been driven by higher steel production, a soaring coal price and potentially speculators re-entering the market.
In April-May this year China's regulators took steps to discourage speculation in the commodities markets which resulted in sharp falls in trading volumes and prices. Iron prices fell from US$70.46 a tonne on April 21 to US$49 a tonne on May 26. if speculators are again suspected of driving prices higher, Chinese authorities could act again.
Some market commentators have attributed the soaring commodity price to the US election win by Donald Trump, but the fact is that commodity prices were rising weeks before the election and most people did not expect Trump to win.
UBS's Morgan also points out that structural issues in China's property market and therefore steel overcapacity still exist. At some point, that could correct itself which will likely result in lower prices for iron ore – and coal.
Foolish takeaway
If the iron ore price can maintain these levels, that's good news for Australia's economy. The May Budget had priced in iron ore prices of US$55 a tonne so that higher prices would be a massive boost to the budget, as well as the junior iron ore miners.
