Views Update: Bearish Iron Ore

We have entered a bearish iron ore view into our commodities strategy table and expect a significant decline in prices over the coming months. The Q313 relief rally in industrial metal prices looks to be running out of steam and iron ore is the most vulnerable to losses. We have consistently highlighted that headwinds for metal prices would resurface as we approached Q413 and this appears to be playing out. We see room for a move down to US$110/tonne by end-year, approximately 15 % below current levels.

Our view that industrial metal prices would only enjoy a limited rally in Q313 has been bolstered by widespread weakness in recent days ( see 'Global Commodities Strategy', September 4). Despite consensus-beating Chinese manufacturing PMI readings for July and August, the industrial metals index has failed to break back into its Q113 range and from a technical perspective, remains locked in a secular downtrend. This reinforces our view that economic stimulus measures in China will have a diminishing impact on end-user metals demand ( see 'Our Take On the Latest Stimulus', August 13).

Industrial metal prices look ripe to resume their multi-quarter downtrend and we see iron ore as most vulnerable to losses. The key reason for this is that iron ore is the metal most exposed to Chinese demand, with the country accounting for two-thirds of world imports. This link saw iron ore prices rally 25% between July and August, underpinned by optimism over the positive impact of government economic stimulus on domestic steel demand. As we expect steel demand growth to disappoint in the coming months, iron ore demand from the country should undershoot market expectations.

Downtrend To Remain In Place
Iron Ore, 62% Grade (US$/tonne)*

We have entered a bearish iron ore view into our commodities strategy table and expect a significant decline in prices over the coming months. The Q313 relief rally in industrial metal prices looks to be running out of steam and iron ore is the most vulnerable to losses. We have consistently highlighted that headwinds for metal prices would resurface as we approached Q413 and this appears to be playing out. We see room for a move down to US$110/tonne by end-year, approximately 15 % below current levels.

Downtrend To Remain In Place
Iron Ore, 62% Grade (US$/tonne)*

Our view that industrial metal prices would only enjoy a limited rally in Q313 has been bolstered by widespread weakness in recent days ( see 'Global Commodities Strategy', September 4). Despite consensus-beating Chinese manufacturing PMI readings for July and August, the industrial metals index has failed to break back into its Q113 range and from a technical perspective, remains locked in a secular downtrend. This reinforces our view that economic stimulus measures in China will have a diminishing impact on end-user metals demand ( see 'Our Take On the Latest Stimulus', August 13).

Stimulus Rally to Fade
Select Commodity Prices, Rebased

Industrial metal prices look ripe to resume their multi-quarter downtrend and we see iron ore as most vulnerable to losses. The key reason for this is that iron ore is the metal most exposed to Chinese demand, with the country accounting for two-thirds of world imports. This link saw iron ore prices rally 25% between July and August, underpinned by optimism over the positive impact of government economic stimulus on domestic steel demand. As we expect steel demand growth to disappoint in the coming months, iron ore demand from the country should undershoot market expectations.

Cooling Demand From Bloated Steel Sector
China - Iron Ore Demand Drivers

In terms of timing the view, a modest uptick in iron ore inventories at ports over recent weeks implies that short-term availability of iron ore in China has improved since mid-year, when a supply-squeeze catalysed a price rally. Iron ore stockpiles at Chinese ports are approximately 2mn tonnes higher than their Q213 lows. From a technical perspective import prices have lost momentum just shy of multi-quarter resistance that comes in around US$140/tonne, reinforcing the medium-term downtrend.

Global Commodities Strategy
Entry Date Entry Level Gain/(Loss) Rationale
Note: Returns do not take into account roll yield, unless stated otherwise. Source: BMI, Bloomberg
AGRICULTURE
Bearish Rough Rice (front-month CBOT) 29-Aug-13 16.65 5.77% Thailand will release its stocks and scrap its subsidy policy, very well-supplied global market.
ENERGY
- - - - -
METALS
Bearish Iron Ore (SGX third-month swap) 05-Sep-2013 129.1 0.00% Chinese demand to resume slowdown, supply to improve
Bullish Platinum (spot) vs Gold (spot) 29-May-2013 1.055 1.85% Supply disruption in South Africa, growing autos use to support platinum prices. Bearish gold.

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