Current change in trajectory in iron ore market has brought a sigh of relief to the miners. Market expectedly rallied from USD 90 per tonne levels to gain 6%. Current price level for Fe 63.5/63% is USD 95 per tonne. Gaining USD 5 per tonne within 10 days seems encouraging in the backdrop of abysmal condition before.

Unviability of domestic iron ore supply had forced Chinese mines to close thereby making it imperative for the Chinese mills to import. Moreover blistering production of steel in recent months in China has kept the import moving at smooth pace culminating in stock of 115 million tonne. May steel production was 70.4 million tonne YoY 2.6 % growth and the pace remains unabated in June touching daily steel production of 1.8326 million tonnes per day.

However the current sparkle is likely fade away soon owing to the following reasons

Firstly, this could turn out to be an unrealistic rally. The industry is facing a flood of new iron ore supply from the likes of BHP Billiton Limited. BHP is on track to raise its total annual production to 260-270 million tonnes, up from a planned 217 million tonnes in 2014. It is massively ramping up production volumes. This supply could mean prices remain subdued. Please refer to our earlier article published on June 12th 2014 “Iron ore miners stare at uncertainty as capacity outnumbers demand globally”

Secondly, this time really could be different! While past drops have been met with corresponding rallies, this time around China’s demand for steel really may be waning. Reports of a huge overbuild of housing in China have been doing the rounds for years. With construction a key end user of iron ore, the effect of a housing slowdown could have serious repercussions.

Thirdly, the Bureau of Resources and Energy Economics recently released its 2015 iron ore price forecast which was for an average price of USD 97 per tonne. Compared with prior year averages this will seriously dent profits for miners.