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Riding The Iron Ore Roller Coaster

Riding the Iron Ore Roller Coaster

To say iron ore has been volatile lately would be an understatement. In early September, the price for benchmark iron ore (with 62-percent metal content) plunged to a three-year low of $86.70 per metric ton (MT). A year earlier, it  traded as high as $180.

That raised concerns about a further fall as the sluggish global economy lowered demand for the metal, which is the main ingredient in steelmaking. However, as is the case with many resources, China has a big impact on prices — it consumes roughly 65 percent of the world's iron ore exports — and developments in the country quickly shifted conditions back into the metal's favor.

An exceptionally cold winter slowed China's domestic iron ore production, forcing it to rely more heavily on imports. That, combined with a surge in restocking activity at the country's steel mills, helped send iron ore on a nearly uninterrupted four-month run that culminated in a 15-month high of $158.50 per MT on January 8. Since then, the metal has slipped to around $145 per MT, again on concerns about weaker Chinese demand, according to Australia's PerthNow. But even with the drop, iron ore is still up about 67 percent from September's low.

Lower Chinese inventories should help support prices in 2013

At the same time, iron ore inventories held at Chinese ports have continued to fall, from over 95 million MT in September to around 70 million today, according to data from The Steel Index. That tighter supply is helping support prices in the near term. However, many analysts are still predicting lower iron ore prices by the end of the year.

Iron ore prices will average $125 per MT in 2013, slightly lower than last year's average of $128, according to a recent Reuters poll of 17 analysts. China's crude steel output is forecast to rise 5 percent this year, to 749 million MT, but there are concerns that this amount won't be enough to take up the slack from new iron ore projects that are slated to start up in the next few years. Goldman Sachs (NYSE:GS), for example, forecasts a surplus of 20 million MT of iron ore this year, rising sharply to 215 million MT by 2016.

As a result, a number of banks have released reports that point to softening prices in the second half of 2013. JPMorgan Chase (NYSE:JPM), for example, forecasts an average iron ore price of $120 in the fourth quarter, down from $145 in the first quarter. Deutsche Bank (NYSE:DB) is somewhat more bullish and sees prices climbing to $170 in the first half before falling below $120 in the latter part of the year.

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