Investors in our listed iron ore producers could end the year with a bang as the price of the steel making ingredient looks poised to enter a bull market.
The share prices of BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) have been outperforming the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) recently amid another overnight gain of 1.5% in the price of iron ore to US$62.99 a tonne.
According to the Metals Bulletin, the price of the commodity with 62% iron content (62% Fe) is up 15.7% this month alone. The commodity could be on the cusp of a new bull market, which is defined by a gain of 20% or more.
The price rally coincides with China's push to combat pollution by shutting down dirty steel making plants. This in turn has been driving demand for 62% Fe as the high iron content makes the ore cleaner to process.
That is great news for BHP and Rio, but it perhaps explains part of the reason why Fortescue Metals Group Limited (ASX: FMG) has been lagging in recent times.
Citigroup speculates that iron ore inventories in China could hit record lows next month, which will provide a big sentiment boost for the sector.
Even in the face of these tailwinds, experts can't agree if the iron ore rally can be sustained in 2018. Deutsche Bank believes the medium-term outlook for the commodity is bearish as it is expecting a slowdown in Chinese steel demand while Macquarie Group Ltd (ASX: MQG) is forecasting the price of iron ore to tumble to US$54 a tonne in 2018, according to a report in the Australian Financial Review.
The crash could come even sooner if Capital Economics is on the money. The independent research firm is tipping a price of US$50 a tonne by the end of this calendar year before iron ore stages a modest recovery to end 2018 at US$55 a tonne.
A weak construction sector and government-mandated steel production cuts in China this winter will exacerbate the decrease in demand for iron ore said Capital Economics.
"China's construction sector is struggling as fixed-asset investment spending has weakened on the back of tighter credit conditions," explained Capital Economics.
"Indeed, construction starts contracted in year-on-year terms in October. We think there are already clear signs that the Chinese economy is slowing and the current levels of steel demand and production are unlikely to be maintained even without government intervention."
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