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BarCap sees iron ore softening to circa $50/dry mt CFR in Q4

Highlights

Barclays Capital restated its view Monday that iron ore prices are likely to decline further, averaging $50/dry mt CFR in the fourth quarter.

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In a note sent to S&P Global Platts, the bank pointed to three main factors that could hit iron ore, and copper, prices: first, "demand side rationalization" from China's impending 19th Communist Party Congress; second, a cooling macro-economy, particularly in the real estate and appliance sectors, and third; any clampdown on price inflation.

The iron ore rally "has been predicated on high steel prices, which look vulnerable in our opinion to a rapid selloff as soon as China begins to crack down on rising PPI pressures," BarCap said.

Any fall in steel prices would translate into "switching" by mills to lower-productivity blast furnace feeds, which are "clearly abundant within China."



This would filter into softer iron ore prices even macro-conditions remain supportive.

"If macro conditions worsen, the process will be accelerated.

"We continue to see marginal producer support at the $40-$45/mt level, which helps explain our forecast of a $50/dmt price equilibrium in the coming quarters," BarCap added.

It also said new leadership in China could look to intensify economic reform, biting in to downstream demand.

"We believe that a further tightening of credit conditions, a throttling of the real estate market, or shutdowns of uncompetitive manufacturing operations that consume steel or copper are all possibilities in 2018 and beyond as a new generation of leadership takes hold," the bank said.

With Chinese steel production at an all-time high of 74.6 million mt in August, it said the 2sector has nowhere to go but down over the next few quarters."

--Colin Richardson, colin.richardson@spglobal.com
--Edited by Jonathan Fox, jonathan.fox@spglobal.com