Are Iron Ore Prices Set for a Rebound?

Iron ore prices will remain range-bound as China continues to rebalance its economy.

Apr 9, 2014 at 8:31AM

Iron ore prices have made a recovery in the past few weeks after falling sharply last month. The recent rebound in iron ore prices can be attributed to last month's robust demand from China. The key question is whether the trend can continue going forward.

Iron ore prices recover
Although iron ore prices are still down sharply for the year, they have recovered a bit in the past few weeks. The price for iron ore with 62% content is currently hovering at around $117 a ton, well above the level hit in last month's sell-off. March's sell-off was triggered by concerns over a slowdown in China. Not surprisingly, the recovery has come on the back of strong demand from China.

According to Bloomberg, iron ore exports to China from Port Hedland in Australia rose to 27 million metric tons in March, a record. Exports from Port Hedland to China in February totaled 21.3 million tons. The data is certainly encouraging for Australian miners such as BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RIO), which have been ramping up production. It is also somewhat confusing given that the economic data from China in the past month pointed to a slowdown.

In fact, Vale (NYSE:VALE) CEO Murilo Ferreira recently played down concerns over the state of the Chinese economy. Ferreira is not the only senior executive at a mining company to have played down China worries. Last month, BHP and Rio executives also said that demand for iron ore should remain strong.

Vale's CEO said recently at the Melbourne Mining Club that he was emboldened by the fact China had close to $4 trillion in cash reserves and a high savings rate across the population. Ferreira said that he is more worried about the debt situation in the U.S. He sees a strong floor at around $110 a ton for iron ore prices.

Will the recovery in iron ore prices continue?
With senior executives at Vale, Rio, and BHP playing down China worries, the big question is whether iron ore prices will continue to recover. Indeed, strong exports from Australia's Port Hedland to China last month are an encouraging sign. Stockpiles of iron ore at Chinese ports also fell for the first time since December, although they still remain at approximately 107.9 million tons.

The strong demand can be attributed to an expected pickup in construction activity in China as the weather turns warmer. Add to this China's recent "mini stimulus." These factors will certainly provide support to iron ore prices. However, there is another major factor influencing iron ore prices.

The iron ore market is well supplied at the moment. As I have noted before, miners such as Rio and BHP have been ramping up production. Vale has also been expanding its iron ore production, as the company's CEO noted in Australia. The Roy Hill project, which recently secured financing, is also expected to add to supply from 2015 onward. Meanwhile, demand from China is expected to weaken as policymakers in the country remain focused on rebalancing the economy. China's commitment to rebalancing its economy can be gauged from the size of the recent stimulus.

While Chinese policymakers have announced some stimulus measures to support growth, the size of the stimulus package is not that big. This indicates that Chinese policymakers are not likely to go all out to stimulate the economy. Of course that means the country's demand for raw materials will not match the levels seen in the previous decade.

Given this scenario, I don't expect to see significant appreciation in iron ore prices.

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Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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