By Jasmine Ng
(Bloomberg) -- Iron ore will probably snap back to $45 a
metric ton as a nascent real-estate rebound in China won't
bolster construction demand in the world's biggest user and
supplies remain plentiful, according to McKinsey & Co.
The commodity will trade between $45 and $50 a ton this
year, eroding a first-quarter rally to as high as $63.74 that
was spurred by speculation demand growth will rise, Oliver
Ramsbottom, a Tokyo-based partner, said in an interview. There's
no real improvement in Chinese steel consumption, said
Ramsbottom, who's covered commodities for almost two decades.
Iron ore's 24 percent surge this quarter has surprised many
forecasters who'd expected a fourth year of losses driven by
sinking steel demand in China and rising low-cost supply. The
rebound hasn't swayed many skeptics, with banks including
Goldman Sachs Group Inc. reiterating bearish forecasts.
McKinsey's view that iron ore gains will probably prove
transient came as one of China's largest mills warned that the
global steel industry's crisis has become so severe that it's
comparable to a new "Ice Age".
"There's plenty of supply, there's relatively weak
downstream demand and sure, you get some uplift in price, but
it's not really that significant," said Ramsbottom. "There's
little reason that iron ore is going to go above $45-to-$50 per
ton. If anything, there's probably more downside risks."
Goldman's Target
Ore with 62 percent content in Qingdao fell 1.7 percent to
$54.18 a dry ton on Wednesday, dropping for a sixth day,
according to Metal Bulletin Ltd. Prices, which posted a record
one-day gain on March 7, are still set for their biggest
quarterly advance since December 2012. Goldman has a year-end
target of $35, while Citigroup Inc. projects an average of $38
for 2016 and $35 for 2017 and 2018.
Iron ore's first-quarter gain has come as data showed
China's home prices climbed in the most cities since March 2014
and steel prices rallied. Policy makers have signaled that
they're prepared to bolster the weakest economic growth in a
quarter century. While the country started easing property curbs
in 2014, the measures have helped to lift prices in the biggest
centers, without yet easing a glut of unsold homes in smaller
cities.
'Will Be Hurt'
"You still have oversupply, certainly residential in the
third- and fourth-tier cities," said Ramsbottom, who lived in
China for about 15 years. "If the government continues to say
'OK, we're not going to resort to increasing credit and allowing
real-estate developers to start building again'," then iron ore
demand and prices will be hurt, he said.
Infrastructure and construction account for about half of
China's steel consumption, Bloomberg Intelligence estimates. As
the country seeks to transition away from investment toward
consumption-led growth, steel demand will contract 3 percent in
2016 after shrinking 5.4 percent last year, according to the
China Iron & Steel Association.
The steel industry within China and overseas has entered
into an Ice Age as mills contend with excess capacity and fierce
competition, Angang Steel Co. said in an earnings statement on
Wednesday. The country's fourth-largest producer, which reported
a drop in output, posted a net loss of 4.59 billion yuan ($710
million) for 2015 compared with a profit a year earlier.
"There's still a bit of uncertainty out there in terms of
how the construction sector, the real-estate sector is going to
develop over the course of this year," Ramsbottom said. "There's
no real, fundamental improvement for steel consumption growth in
China."
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