A sudden surge and slump in iron ore prices in the wake of Donald Trump’s election win does not sit well with increased speculative trading
Iron ore prices have given up most of the gains stimulated by Donald Trump’s election win against Hillary Clinton in the 2016 US presidential election and the recent speculative frenzy in China.
However, the speed of the recent price rally leaves it open to the charge that price action has been “too much, too fast”, noted Dane Davis, an analyst at Barclays Plc, in a note that asked “After the party… the hangover?”.
Mr Davis added that the balance of risk for iron ore, as well as copper, is skewed to the downside as the dollar strengthens and the effects of Mr Trump’s win wears off.
Iron ore rocketed to a two-year high in November as investors celebrated Mr Trump’s outlook for infrastructure spending, which co-incided with a surge in commodities future volumes in China. However, the rally reversed after exchanges raised charges to quell the enthusiasm. The US currency also rose on hopes for higher interest rates. Added to this, port data has reinforced signs of amply supply of the commodity.
“The recent surge in prices has to do with speculation, and trading has since become more rational… iron ore’s fundamentals have never been great.”
In an interview with Bloomberg, Mr Davis said: “As it did earlier this year, China has cracked down on speculation in the iron ore market. With these stricter standards in place, the iron ore price should continue to ease off recent highs, though it may find support from continued highs in other steel raw materials, such as met coal, and a domestic steel market that looks set to grow production in 2016.”
Surge and slump
Iron ore prices rallied in November, closing just under the $80 per tonne level for the first time in two years. However, Dang Man, an analyst at Majke Futures Co. in XI’an, China, told Bloomberg: “The recent surge in prices has to do with speculation, and trading has since become more rational. Iron ore’s fundamentals have never been great. The huge increase in port stockpiles doesn’t bode well.”
Reuters reported that Chinese iron ore futures have fallen 16% from a 33-month peak as the rally lost steam following a series of measures by China’s exchanges to crack down on speculative trading in commodities.
The sudden surge and slump is already having an impact on the dry bulk sector. Iron ore producer Rio Tinto is planning to cut jobs across its iron ore division in Western Australia, according to Melbourne-based spokesman Bruce Tobin. Mr Tobin said the market outlook remains challenging, and added that the miner has 1,000 initiatives underway to reduce costs and improve productivity.
Additionally, miners’ shares have been whipsawed by the price peak and trough. In Sydney, Fortescue Metals Group has also been struggling in recent weeks. So too has Brazilian mining company Vale SA.
Freight is also girding itself for the decline. In its latest Dry Bulk Freight Forecaster, global shipping consultant Maritime Strategies International (MSI) also noted that a basket of key commodities prices – notably iron ore, coking and steam coal – has surged dramatically in recent weeks, again due mostly to falls in domestic supplies in China.
MSI expects this trend to continue in the fourth quarter, but notes that weaker iron ore and coal trade will likely impact capesize and panamax demand in the near term.
MSI senior analyst Will Fray said: “The capesize market is demonstrating what might be termed ‘frothy’ characteristics with patches of strong chartering despite weak underlying fundamentals. On this basis, it is difficult to build a reliable view on how long this freight rate uptick will last, but in any case we expect spot rates to fall back below operating costs in the new year.”
This, he added, will be mainly as a result of weaker iron ore trade in the first quarter. By the second quarter, however, Mr Fray expects to see strong Chinese coal production limiting coal import requirements.