After an unexpected 20% surge in the third quarter, iron ore prices have finally come down to earth, with market strategists and analysts re-evaluating their outlook for the commodity, according to a report in The Australian Financial Review.
Notably, iron ore futures in Singapore had peaked to a six-month high after touching US$100 a tonne in early July, driven by persistent purchases by Chinese steel mills despite uncertainties in the country's property sector.
In Australia, many banks, including ANZ and Commonwealth Bank, have tipped prices to dip below US$100 per tonne by year-end in view of the resilience of the country’s key export item.
Gone against trend
An exception to this trend was a forecast by Singapore-based Inspirante Trading Solutions.
In a July report, Inspirante predicted that iron ore prices would align with a recovery in Asian equity markets, suggesting a long play on futures contracts.
“From the current level of US$104.2, we will take risk-measured stop at $US98, slightly below a previous level of support, and take profit at $US120,” Inspirante wrote in the report that was released by Singapore exchange SGX, a major trading floor for iron ore futures.
Iron ore futures hit US$120 per tonne six weeks after the report was published and have stayed at that level until recently.
November contracts are currently trading at around $US115.34 per tonne.
Not surprised
In retrospect, Inspirante research analyst Dylan Chan said the team was not entirely astonished by the price rally.
"Our research indicated that market sentiment toward China was excessively bearish," he told The Australian Financial Review, noting that iron ore has shown historical tendencies to surge even amid bleak Chinese economic indicators.
Chan was unaware if any iron ore traders have profited from the firm’s call.
SGX director of commodities Jin Yu Cheong said participation in the futures market has diversified in recent years and now includes banks and funds in addition to steel industry traders.
He attributes this not just to price fluctuations but also the unique nature of the iron ore price curve that can yield consistent returns.
Revising outlook
Major research firms have re-evaluated their outlook for the commodity following the recent rally, including Morgan Stanley (NYSE:NYSE:MS), where analysts have raised their fourth-quarter outlook for the iron ore price by 17% to US$105 per tonne.
“The unexpected strength in iron ore prices … is raising questions about how much higher the iron ore price can go, especially if China does move to cap steel production for FY23,” its commodities strategist Amy Gower wrote in the report.
Gower is now predicting iron prices to hit US$120 per tonne by the end of the first quarter in 2024.