A rally in iron-ore prices has recently pushed the commodity into the bull market. But analysts caution the rally may be a short-term bump.
The ore has rebounded 25 percent since hitting a ten-year trough of $46.70
per metric ton earlier this month. A twenty percent gain from recent lows is considered in the bull market territory.
Spot prices traded just below $60 a ton on Tuesday, extending a two-and-a-half week run and pushed Australia's benchmark stock index to seven-year highs on Monday.
"Let's not get too carried away. Iron ore is still down 60 percent over the course of 12 months and the supply-demand response has not changed," warned Gaurav Sodhi, resources analyst at Intelligent Investor. "This [rally] is a short-term bump; it's not suggestive of a change of trend."
"The bigger picture is that the market remains massively oversupplied. As such, we expect prices to fall back once market dislocations ease," senior commodities economist at Capital Economics Caroline Bain said in a note.
Current price gains are fueled by increased Chinese demand. The China Iron and Steel Association (CISA) reported on Friday that output rose 5.1 percent in the first ten days of April compared with the previous ten days.
April's reserve requirement ratio cut from the People's Bank of China also lifted sentiment on expectations the stimulus will translate to more infrastructure spending.
More to that, in its recent announcement, BHP Billiton said it would delay plans to expand its Port Hedland facilities, signaling reduced output and thus helping to boost iron-ore prices.
However, with all the positive factors in action, Sodhi says the market remains plagued by oversupply, with 300
million additional metric tons due to come online over the next two
years. A supply glut from top producers saw iron ore halve in value in 2014.
"Iron ore has seen no fundamental change to supply – in fact quite the opposite having seen quarterly reports from Rio Tinto and BHP Billiton
last week," said Evan Lucas, market strategist at IG. Both miners are
on track to deliver record production numbers, with BHP lifting
guidance by 2 percent.
Bain added that the world's big four miners (Vale, Rio Tinto, BHP Billiton, Fortescue Metals)
all remain committed to increasing low-cost output, with their total
combined production increasing 15 percent on year in the first quarter. She thus expects total surplus to rise 10
percent this year.
Strength of demand from China is also questionable. Iron ore is the raw material used in steel, and with output from
world's top producer China remaining on the downtrend, iron ore prices
will remain under pressure.
Capital Economics noted that the recovery in Chinese steel output in April came from an unusually low base. Production from January to March dropped 1.7 percent on year, marking it the worst first quarter in a decade.
The World Steel Association expects Chinese steel demand to shrink 0.5 percent to 707 million metric tons this year and fall to 703.7 million tons in 2016.
