Mining and Heavy Industries

Iron ore makes historic bounce, but will it last?

Analysts are doubting the long-term significance of a 19% rise in the price of iron ore on Monday, which boosted Australia’s iron ore majors on the stock exchange.

The spot price for 62% Fe benchmark iron ore surged to US$63.74 per tonne on Monday, March 8, its highest point since June 2015, and the highest single-day percentage rise on record.

The price leap was triggered by Chinese policymakers, who indicated an improved economic growth outlook, resulting in increased steel consumption forecasts.

Chinese analyst Zhao Chaoyue, quoted by Bloomberg, said the news had driven the local market into a frenzy.

“The iron ore and steel markets have gone berserk,” Chaoyue was quoted as saying. “They’ve departed from fundamentals and are heavily driven by sentiment.

“Investors are expecting further monetary easing by the Chinese government to boost steel demand.”

Monday’s price surge led to share bounces for Australia’s trio of major iron ore miners: BHP Billiton (up 4.9% on prior close to $18.55), Rio Tinto (up 3.5% to $46.47) and Fortescue Metals Group (up 23.7% to $3.08).

All three majors encountered minor downward adjustments on Tuesday, but remained above their Friday close by the end of trading. The adjustment was driven by a small downtick in the iron ore price, of 11c to US$63.63.

After Monday’s growth, a mere 11c downturn on Tuesday served to assuage some concerns over the sustainability of the price bounce.

But several analysts are indicating the price will continue to decline in the long term.

“We expect the current rally to be short-lived,” a pair of Goldman Sachs analysts said in a note, quoted this week by Bloomberg.

UBS commodity analyst Tom Price reportedly told the ABC that the price spike was “a bit surreal, even for the most bullish [analyst]”.

“Twenty per cent equals record high equals not normal,” Price was quoted as saying.

Another UBS analyst, Daniel Morgan, was quoted by ABC: “The latest couple of months reflect minimal demand pick-up due to slow infrastructure build.

“Government pronouncements of mill shutdowns for capacity rationing and pollution reduction have boosted steel price sentiment, but if enacted, will reduce iron ore demand.”

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