Iron ore prices have bounced from the lows seen earlier in the month, trading a little above $95/t.
Over the past few years, when iron ore prices have shifted direction, they have tended to move up (or down) a long way. Is such a rally on the way?
First, what has driven the recovery to date? Like many other commodities, the bounce in iron ore is driven by Chinese data that has proven to be as better than most had feared.
While iron ore is the clear underperformer in the YTD, the recent pick up in prices in conjunction with better copper prices and base metals more generally.
It's also clear from the hard data that its not just better sentiment driving rising prices. The CISA 10 day production data has yet to show any ill affects of the slowdown in residential property markets, with production growth proving resilient.
While crude steel production growth has been decent, there has been a build up at inventories at mills, which are not as bad as earlier in the year, but are still noticeably higher than previous years.
This may prove problematic for raw materials heading into the summer lull regardless of the trajectory of housing markets.
It has been suggested that restocking has supported iron ore prices, but that seems unlikely given one of the most liquid part of inventories in port stocks are still relatively high (but not disastrously so in terms of days of consumption).
Again, this poses risks heading into the summer lull for manufacturing through July and August.
Seaborne supply growth has remained very strong, with exports from Brazil and Australia up over 20%YoY.
The rate of supply growth should slow a little in 2H14 given the biggest gains via Port Hedland were in the second half of last year. But the level from Australia will still be very high.
It's also notable that Brazilian exports have been strong in the last two months. If Brazil can continue this strength into the seasonally stronger second half, it would be something that would spur stronger capesize rates as more ships relocate into the Atlantic.
So is the worst behind us for iron ore in the short term? I tend to think not, as there is still the issue of somewhat high steel inventory at mills and iron ore stocks at ports as consumption rates drop into the summer.
Also, just because the crunch in property markets hasn't undermined steel output levels yet, doesn't mean it won't. For that reason, its tough to give the all clear on iron ore prices.
