Iron ore may extend losses before rebounding, offering investors an opportunity to buy the steelmaking raw material to profit from a recovery driven by low inventories in China, according to Morgan Stanley.
The commodity, which reached a seven-month low of $111.60 a dry ton today after entering a bear market this month, may decline toward $100, Melbourne-based analyst Joel Crane said in an e-mailed note. The seaborne market will be very tight for the rest of 2013 and into next year, Crane said.
Ore is heading for a fourth month of losses as industrial production in China missed forecasts and gauges of manufacturing and service industries declined. The International Monetary Fund this week cut its forecast for China's growth, while Chinese leaders signaled a tolerance for slower expansion. Iron ore plunged 24 percent last August, reaching a three-year low in September, as economic growth slowed in the largest importer.
"We do not think that we are headed toward as deep of an overshoot as we saw last August,' Crane wrote. "Regardless of the eventual floor that is found, once the dust is settled, we would view this as an excellent buying opportunity because mills will undoubtedly need to restock.'
Iron ore with 62 percent content delivered to the Chinese port of Tianjin dropped 1.2 percent today to the lowest level since Oct. 8, according to figures from The Steel Index Ltd. Morgan Stanley's base-case forecasts show prices averaging $130 a ton this quarter and $133 over the full year.
Port Stockpiles
Iron-ore stockpiles at Chinese ports dropped to 66.26 million metric tons on March 8, the lowest since March 2009, according to data from Beijing Antaike Information Development Co. Inventories were 69.46 million tons as of May 24.
Mills are selling ore they bought at second-quarter contractual prices of about $140 a ton, signaling they think spot prices will drop lower, allowing restocking more cheaply, Crane wrote, citing unidentified trade reports. With steel output at a record, such sales won't be sustained, he wrote.
China's domestic iron-ore production remains below trend and there is a risk output will not have its usual midyear surge, Westpac Banking Corp. (WBC) said in a report today. Inventories may end this year at a much lower level than usual, it said.
Iron ore is measured in dry tons, or metric tons less moisture. At Tianjin, moisture can account for 8 percent to 10 percent of the weight.
Source: Bloomberg