Iron Ore’s Rapid Surge Shows Steel Revival

Iron ore’s rally to a two-month high just prompted Macquarie Group Ltd. to sound the alarm as the bank says gains may be well beyond fundamentals, with abundant supply from miners, inventories stacking up at China’s ports and steel production set to contract.

Speculation about stimulus in China has helped to lift prices. The note asked whether iron ore was “getting carried away again?”

Iron ore was caught up in a speculative rally in China earlier this year as prices soared in April, prompting a host of banks to warn that the surge wouldn’t last, after which rates cratered. Last week, Australia cut its price outlook for 2017 by 20 percent, citing prospects for increased supply just as steel output in China shrinks further. Goldman Sachs Group Inc. said recent stimulus in China hadn’t brought a meaningful increase in steel demand, according to a report received on Wednesday.

Ore with 62 percent content delivered to Qingdao fell 0.4 percent to $59.15 a dry metric ton, according to Metal Bulletin Ltd. on Wednesday, a day after prices gained to the highest level since May 5. The material capped a three-month rally in April with a 23 percent gain that month, only to collapse in May.

Recent advances in iron ore and steel were also linked by Macquarie to lower trader product inventories in China.

More iron ore is being shipped, and analysts have flagged the risk that prices will probably weaken into the year-end. On Monday, data showed that cargoes from the world’s biggest bulk-export terminal in Australia rose to a record in June, three days after the government cut its price forecast.

Record Volumes

On Wednesday, official data from China showed that the country both imported a record volume of iron ore in the first half, and shipped out the most steel ever in the period. Ore imports were 494 million tons between January and June, 9.1 percent more than a year earlier, while exports of steel neared 10 million tons a month.

Steel demand in China is shrinking for the first time in a generation as growth slows and the government steers a transition away from a metal-intensive economy reliant on investment to one where services play a bigger role. That’s resulted in the declining sensitivity of steel consumption to credit flows in China, according to Goldman.