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Short-Term Demand Recovery, but Weak Long-Term Fundamentals

Annie Gilroy

Key for Investors: Iron Ore's Long-Term Fundamentals Remain Weak

(Continued from Prior Part)

Iron ore prices are at a three-month high

Currently, as of June 2, iron ore prices are at a three-month high of $63 per ton. These elevated iron ore prices—compared to decade-low prices touched on April 2 of $47.08 per ton—are due to tight iron ore inventories at Chinese ports. Iron ore shipments from Brazil and Australia were weak in April. This caused the inventories to be used up at the ports.

As we’ve discussed previously, despite weak steel prices, the demand for iron ore picked up in the Chinese market due to tight inventories.

Iron ore futures too rise

Dalian iron ore futures also increased to a three-week high on June 2, 2015. This is mostly a short-term gain on shrinking inventory at ports. Some shipments from Australia were disrupted by bad weather. This is causing inventories to decline below the historical average. As a result, there’s a rise in spot and futures iron ore prices.

Long-term fundamentals are still weak

Although the short-term prices are recovering, the long-term fundamentals still remain weak. Iron ore prices’ weakness started in 2014. The main reason was the supply glut from major iron ore producers—including BHP Billiton (BLT) (BHP), Rio Tinto (RIO), Vale SA (VALE)—amid slower-than-expected growth from China. China is the major market. It consumes close to two-thirds of seaborne iron ore.

Neither of the two factors mentioned above seem to be getting corrected anytime soon. There’s a fresh wave of supply that will come online later this year and next year. In contrast, Chinese demand indicators still remain subdued. This is still negative for iron ore players including Cliffs Natural Resources (CLF). Cliffs forms 3.6% of the SPDR S&P Metals and Mining ETF (XME).

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