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)*

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Geography: Global, Global, Greece, Global, Global

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