World Economy

Weaker Iron Ore Demand May Hurt Prices

Weaker Iron Ore Demand May Hurt PricesWeaker Iron Ore Demand May Hurt Prices

Iron ore, dubbed by Citigroup Inc. as one of the hot commodities of 2016, looks set to cool off. Prices may soon sag as supply rises and steel demand fades, the bank said, adding to a chorus of forecasters who are calling time on an unexpected rally.

The raw material will average $51 a metric ton in the final quarter and $45 in 2017 under the base-case scenario, analysts led by Ed Morse said in a report received Tuesday. That compares with Metal Bulletin Ltd.’s 62% content price of $61.23 a dry ton on Monday, and a year-to-date average of $53.59, Bloomberg reported.

“Believe it or not, iron ore and coal are the hot commodities of 2016,” the bank said in the note, advising that investors “fade them as commodities stumble to rebalance.” It added: “Don’t expect the strength to last. Structurally the world remains oversupplied with relatively low-cost material.”

While iron ore has soared more than 40% in 2016 after three annual losses, banks are now queuing up to forecast the likelihood of further weakness ahead, with Morgan Stanley and UBS Group AG also flagging prospects for declines as 2016 unfolds. Citigroup said that although iron ore’s strength may persist into October, a weakening of demand, coupled with rising mine supply, would probably hurt prices thereafter.

Iron ore “may face strong headwinds towards the end of 2016 and most of 2017,” the analysts wrote, calling it a “darling” of commodities so far this year. “Supply-and-demand balances in 2017 point to lower prices, with Chinese demand deteriorating and new projects by Vale and Roy Hill ramp up further.”