Big questions have been asked in recent weeks about the iron ore rally, with many financial institutions forecasting that we will see a weakening of prices in the second half of 2020.
Brazil continues to have serious control issues with COVID-19 and seemingly no plan to lockdown the country on a grand scale. Vale won permission to reopen a mining complex last week indicating iron ore flows should increase, meanwhile Steel Home data shows an increase in Chinese port inventories for the first time in nine weeks.
Second spike fears continue to be the focus with China, Germany, U.S and Australia under the microscope. However, control methods are likely to be targeted by area rather than countrywide, suggesting the iron ore market at least should see a continued increase in supply.
With blast furnace utilization rates above 90% a further increase in production is looking limited compared to supply, indicating the fundamentals are at a tipping point. Onshore and offshore futures prices have remained stable for around the last three weeks and the rally has been neutralized for now.
Prices have broken the channel support highlighted on June 9 (Has Iron Ore Reached its Top), indicating technical weakness in line with the fundamental view. At this point the futures look vulnerable but have not fallen out of bed.
As we have discussed previously, sentiment and fact are not the same. Sentiment is likely to drive the iron ore price lower, fact will need to back it up. If the supply increase is not significant, then this move will be corrective and not bear, putting the offshore futures in the USD 85.00 – USD 95.00 bracket, and not the USD 75.00 to USD 85.00 area. This would suggest mill owners are likely to continue to support the second half of 2020 futures curve until the facts change. (FIS)