"I'm not optimistic that the iron ore price will keep going up," Zhu, president of Hong Kong-based trader Millennia Resources, said in an interview, predicting that prices will probably trade between $US50 and $US60 a metric ton for the rest of 2016.
Iron ore has soared in 2016 after three annual losses as China added stimulus and a credit-fuelled property boom lifted demand, with steel production rising to a daily record in June. Even as the unexpected surge prompted banks from Morgan Stanley to Goldman Sachs to raise their price forecasts this year, they've also flagged prospects for increased supply.
Ore with 62 per cent content delivered to Qingdao has risen 39 per cent in 2016 to $US60.71 a tonne on Thursday, according to Metal Bulletin. The benchmark, which peaked at more than $US190 in 2011, has traded in a $US15 range bounded by the upper $US40s and lower $US60s for the past three months.
The advance has spurred a rally in miners' shares this year, with Vale's stock surging 57 per cent, while Australia's Fortescue Metals Group has more than doubled in Sydney. In London, Rio Tinto Group has added 26 per cent, while BHP Billiton gained 41 per cent. Shares of the top four producers were routed last year as iron ore plummeted.
Vale will probably start supplying ore from its 90-million-ton a year S11D operation by year-end. The project may produce between 30 million and 40 million tons next year, Claudio Alves, global director of iron ore marketing and sales, said in May.
BHP has also put the spotlight on supply. Chief executive officer Andrew Mackenzie said this week that there's more risk for prices to the downside as the ramp up by low-cost producers continues. Still, iron ore would remain a very high-margin business, according to Mackenzie.
On the demand side, while steel consumption and output in China have been robust this year, they're facing challenges from an economy that's moving away from manufacturing. The US and Europe are also pushing harder than ever to shield local steel industries from Chinese exports, according to Zhu.
Chinese steel production will probably shrink between 3 per cent and 4 per cent over the next 12 months, driven mainly by lower domestic demand, Moody's Investors Service said in a report on Tuesday. The country accounts for about half of global steel production and is the largest buyer of seaborne ore.
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