Iron ore prices have come under pressure as Chinese steel mills appear to be nearing the end of their current stockpile build, but analysts are not yet expecting a prolonged selloff.

The spot price for iron ore slid $US3.90 to $US87.59 a tonne on Tuesday night, the biggest drop since mid-December, while Chinese iron ore futures tumbled for a second day on Wednesday, falling nearly 5 per cent to 586 yuan ($US85.13).

The losses in the futures came after they posted their largest weekly increases in two months last week, and traders say the wild swings in the futures market have unnecessarily swayed the physical market.

"A lot of speculative players in the paper market create volatility in the price and this volatility has affected the physical market," said an iron ore trader in Shanghai.

"Fundamentals have not changed so much. Seasonal demand is still happening because the temperature in most areas in China is warm enough for construction projects to proceed."

Demand for iron ore might slacken somewhat but it's expected to be relatively steady over the next three to four months, according to Macquarie Wealth Management's latest China steel survey.

"Iron ore restocking appears to be easing, as steel mills look well covered for their forthcoming ramp-up in steel output," Macquarie said. "Steel mills are not yet planning to cut iron ore purchases, however, and iron ore prices should continue to be supported while steel prices remain elevated."

As long steel as margins remain high, Goldman Sachs said "we expect iron ore prices to stay in the $US80-90/tonne range until the end of April".

"However, we still expect a downturn in late second quarter or second half of 2017 when seasonal demand weakness and supply strength start to play out," the bank said.

Macquarie analysts earlier this month said they expected iron ore prices to average $US50 per tonne in the second half of this year, which is line with what many analysts are forecasting in terms of a significant pullback ahead.

On a positive note, Credit Suisse's Matthew Hope said the recent stock build at Chinese ports is set to cease from this month, reflecting weaker shipments from Australia in February and a pending lift in China's steel production rate through the June quarter.

"We expect steel output to rise by 2-4 million tonnes per month over January's production, increasing iron ore usage by 4-6 million tonnes per month. At its peak rate of the build, port stocks grew at about 9 million tonnes per month in January and February," Hope said.

"Steel has been resilient at recent peak prices, with rebar climbing to the highest price since mid-2012," Hope also said. "Steel margins are 500-600 yuan which is supporting iron ore buying."

 

Source:afr.com

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