LAUNCESTON, AUSTRALIA – Is iron ore’s rapid move from one of the commodities with the gloomiest outlook to a star performer justifiable and sustainable?
At the start of this year, iron ore looked to be trapped in a vicious cycle of massive oversupply coupled with a declining demand profile.
But Asian spot prices have rallied almost 50 percent since the beginning of 2016, confounding analysts, myself included, who had predicted that any rally was merely an opportunity to take profits and go short again. This means it’s worthwhile looking at what has changed in the iron ore market, and whether these changes are structural or more temporary in nature.
The two major drivers have been some reductions in the expected amount of supply of the steel-making ingredient, coupled with better-than-expected demand as China acts to boost its economy through fixed asset investment (FAI).
Taking supply first, and this week has seen the world’s top three producers all scale back their expected output.
Rio Tinto led the way, announcing on April 19 a cut to its 2017 production forecast to between 330 million and 340 million tonnes from a prior forecast of 350 million.
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