Historically iron ore prices begin to drop this time of year but it seems the recent price surge of the steel-making ingredient has some commentators at odds as to where it will be at the end of the year.
After a two-month rally starting in early June, the price of iron ore was up around 25% but in the last two weeks the price has turned around. The surprising rally was a result of Chinese mills restocking inventory ahead of peak demand in September and October.
Source: Indexmundi.com
In addition to restocking efforts, China's investment in railways has spurred demand for steel.
However poor weather conditions throughout the country have been slowing construction activities. In the Financial Review, RBC capital markets analysts said, "Hot weather in northern China and heavy rains in southern China tempered construction activities, which reduced iron ore demand". The next graph shows the price of iron ore across the past five years, it clearly demonstrates a drop in prices around September every year – last year the iron ore price fell below $90 per tonne.
Source: Indexmundi.com
The current supply levels and somewhat high price (given the amount of surplus iron ore to come online) will put downwards pressure on the price of iron ore – in both the short and medium term. Increased supply from some of the world's biggest iron ore miners including Rio Tinto (ASX: RIO), Vale of Brazil, BHP (ASX: BHP) and Fortescue (ASX: FMG) will enable mills in the price-taking industry to get much lower prices.
Analysts from Macquarie and Goldman Sachs had previously said that iron ore could reach between $80 and $88 per tonne in the medium term as supply outweighs demand. In the short-term the market could expect prices around $130 per tonne in September and as low as $110 per tonne going into the New Year. This would put more pressure on our biggest miners' profits and add to their downwards trending stock prices.
Foolish takeaway
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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.
