Iron ore seen back in $40s as China challenges loom in 2018

“The underlying supply and demand is pretty negative, so over a decent time period we wouldn’t be surprised to see iron ore back in the $40s,” said James Luke, a London-based fund manager at Schroders, which oversees about 418 billion pounds ($556 billion). “We think some shift back toward focusing on underlying demand problems will cause some issues,” he said in an interview.

Iron ore sank into a bear market last month, although record import figures from China for September helped arrest the slide just as investors focus on this week’s Communist Party congress. The outlook from Schroders suggests further losses next year, and it’s similar to forecasts from Citigroup Inc. and Australia’s government. So far in 2017, prices have dropped 20 percent, hurting income for producers including Rio Tinto Group, BHP Billiton Ltd., and Vale SA.

“From here till year-end, I think we’re more balanced now,” Luke said by phone, citing the exit of some supply in China as well as the potential easing of steel capacity cuts beyond October. “Through the next six to 12 months you’re going to see some rebalancing of expectations between supply bullishness to more structural demand worries,” said Luke, who previously worked at JPMorgan Chase & Co. and China International Capital Corp.

Spot ore with 62 percent content in Qingdao fell 0.4 percent to $62.72 a dry ton on Tuesday, snapping three days of gains, according to Metal Bulletin Ltd. While it’s swung this year between almost $95 in February and a low near $53 in June, iron ore hasn’t traded in the $40s since mid-2016.

In its latest quarterly outlook, Australia predicted that iron ore will trade at $49.50 next year and $49 in 2019, citing growing low-cost supply from Australia and Brazil and moderating demand from China. In particular, it saw mainland steel use dropping 1.6 percent to 748 million tons in 2018.

The World Steel Association warned on Monday China’s steel demand will stagnate as the government presses on with rebalancing and environmental protection. Consumption will show no growth at 766 million tons in 2018, according to the group, which flagged the country’s debt problem as a risk.

Citigroup — which has been consistently bullish on the outlook for most commodities — said in a September report that iron ore may fall back to average $53 next year. The sharp on-year drop may be due primarily to heightened concerns of a slowdown in China, as well as extra supply, Citi said.

In a sign of rising supply, Rio Tinto confirmed it’s on track for record annual shipments as a production report on Tuesday showed quarterly cargoes from the world’s No. 2 exporter continued to increase. Rivals BHP and Brazil’s Vale are due to release operational results later this week.

This year, China’s cracked down on mills, shuttering capacity, to ease pollution in a drive that’s intensified in the run-up to the Congress and aided demand for high-grade iron ore. Given the political importance of the gathering, officials might have been motivated to carry out the curbs strictly, and there’s now concern how committed they’ll be after the event, according to Luke.

That “raises the question of whether beyond the Congress, you get a little bit more backsliding at the provincial level or at the company level once political sensitivity is reduced,” he said.