The iron ore price surged another 3.7% overnight, taking the commodity beyond the US$60 a tonne mark for the first time since March.
In what has been a stunning resurgence for the steelmaking ingredient, iron ore has managed to recover more than 30% of its value since early April when it hit a 10-year low of US$46.70. According to figures provided by the Metal Bulletin, the commodity rose US$2.19 during its latest session to be trading at US$60.89 a tonne.
The rally has been sparked by a number of factors, including stimulus from China and rebounding oil prices. But the main catalyst behind the rally has been the updates from two of the world's largest producers suggesting they will put the breaks on their expansion plans.
BHP Billiton Limited (ASX: BHP) became the first to do so when it delivered its quarterly production update, stating that it would defer further spending within its iron ore division. While it will still achieve its annual production target of 290 million tonnes (Mt), it will do so at a slower rate than first thought.
Last week, the Brazilian-based giant Vale provided further hope for the sector after it said it would consider reducing its exports by up to 30 Mt per annum — a move which would further help ease the market's supply and demand imbalance.
Is the rally sustainable?
Indeed, investors are becoming increasingly confident that the recent rally can be sustained, bidding the share prices of stocks such as Fortescue Metals Group Limited (ASX: FMG) and BC Iron Limited (ASX: BCI) considerably higher. According to the Fairfax press, the futures markets are also reflecting this confidence with the futures on the Dalian Commodity Exchange having risen to US$61.30.
While there have certainly been encouraging signs for investors not everyone is so convinced. In fact, Fairfax also reported that the ANZ Bank and UBS have forecast an end to the iron ore rally. Fairfax said that UBS is predicting a return to just US$45 a tonne by the end of the year and into 2016, stating that lower production costs would likely encourage new entrants, resulting in higher production and ultimately, a lower iron ore price.
Unfortunately, it is impossible to say with any certainty where the commodity will go from here, but UBS and ANZ are both right to be wary. The fact is, even if supplies do stagnate, global demand (especially that from China) is likely to continue falling which could well result in a significant pullback. Should that scenario play out, investors who buy the miners today could be hit hard on the way down.
