London financial services firm Liberum downgraded iron ore majors Rio Tinto, BHP Group and Anglo American PLC from "hold" to "sell" with demand for iron ore having "likely peaked" along with Chinese property construction, according to an Aug. 22 note.
Improving shipments, shrinking steel mill margins and the reemergence of U.S.-China trade tensions have seen iron ore prices plunge by about 20% since early July. S&P Global Platts IODEX 62% iron ore CFR North China price slumped further to US$85/t on Aug. 22, from US$94.80/t on Aug. 8.
The firm believes that Chinese economic data in July confirmed its own view that an "out-of-cycle" rally in property construction since the start of the year has peaked. This implies that the government's measures to stimulate demand — cutting interbank rates and stimulating credit growth into property — is no longer working as effectively as before.
The firm thus downgraded its second-half forecast from US$90/t to US$75/t and expects Chinese consumption to turn negative in 2020 when prices will average US$50/t, above which point Liberum sees limited price elastic supply.
The pace of pig iron consumption has also slowed year over year due to the rapid increase in using scrap steel in the blast furnace process, which Liberum said has "cannibalized" 50 million tonnes of iron ore supply over the past 12 months.
Mills have been increasing this use of scrap, which has remained relatively cheap compared to iron ore. A rise in scrap prices have also incentivized collection, and using scrap is a less polluting process compared to sintering then using the iron ore.
Liberum sees EBITDA downgrades of between 34% and 55% ahead for iron ore majors.
In another Aug. 22 note, ANZ Research said it believes that iron ore's recent selloff has been "overdone," with supply challenges and Chinese stimulus measures keeping the market in deficit until 2021. The bank sees prices stabilizing at about US$90/t in the near term.
The bank believes the supply losses in Brazil to be structural, leaving the market under-supplied until 2020, while attractive steel margins amid stronger infrastructure spending in China bode well for demand.
Yet ANZ is also cautious about the impact of China's current infrastructure projects.
The bank believes that the Asian giant's steel output curbs, along with ongoing trade tensions with the U.S., should result in steel production growth easing from the 10.8% seen in the first half. July output growth fell to 4.9% year over year.
ANZ said China's environmental regulations driving more steel mill closures also spells trouble for iron ore demand. Some mills in Tangshan had to halt at least 50% of blast furnace capacity, ANZ said, citing a Mysteel Global report.
Gold takes 'breather'
Bullish sentiment for the precious metal continued during the week even as December gold futures retreated US$6.90 per ounce to US$1,508.90/oz in early afternoon U.S. trading Aug. 22 after a U.S. Federal Reserve official said it is "not yet time" to cut interest rates.
Though UBS said in an Aug. 21 note that gold "appears to be taking a breather, trying to form a base around US$1,500/oz," the bank still maintains the view that gold "has the scope to test US$1,600/oz in the months ahead."
Gold's market sentiment was boosted when investment guru Mark Mobius suggested on Bloomberg TV on Aug. 20 that accumulating bullion at any price would be rewarding in the long run.
Swiss exports have increased to the U.K. due to strong demand for exchange-traded funds, while central banks' gold buying spree also continued as International Monetary Fund data showed several countries raised their gold holdings again in July, ANZ noted.
UBS said preliminary data revealed that the central banks of Russia, China and Kazakhstan increased official gold reserves by 12, 10 and 5 tonnes, respectively, in July, bringing total official sector buying this year to about 400 tonnes. "At this pace, the sector is on track to exceed 2018 volumes," UBS said.
