(CORRECTED) MNI: Iron Ore Volatility Eyed On Uncertain Fiscal Response

(The original story stated the blast furnace operating rate increased 8% over two weeks. This has been corrected to 0.8%)

MNI (BEIJING) - Fiscal stimulus that meets market expectations will likely boost iron ore futures up towards CNY900 a tonne, but the rise will be short lived due to high inventory levels and overall weak demand, local analysts told MNI, warning disappointing measures would see prices peak at about CNY850 in Q4.

January iron ore futures, the most traded contract on the Dalian Commodity Exchange, rallied about 20% over the past two weeks following the People’s Bank of China’s moves to provide monetary-policy support.

However, the sustainability of the gains will require additional fiscal policy and the resumption of consistent molten iron production, said Zhuo Guiqiu, senior researcher at Jinrui Futures. “Otherwise, CNY850 a tonne may be the high point in Q4,” he added.

The January contracts fell 1.99% to CNY786.5 a tonne this week following the National Development and Reform Commission’s disappointing press conference on Monday, which failed to deliver fresh government spending.

The Ministry of Finance has scheduled a similar press conference on Saturday, however, Zhuo believes how authorities plan to spend the money will be more important for the construction sector than the scale of additional government borrowing.

Stimulus to date has so far focused on boosting household consumption and dealing with unsold houses, which will have a limited impact on steel and iron-ore demand, he added.

HIGH INVENTORY

High inventory levels will continue to weigh on prices, despite the rising sentiment due to the stock-market rally, said Wang Siya, senior analyst at Lange Steel Network, pointing to the 143.8 million tonnes sitting across 34 ports as of Oct 9.

Inventory remained high despite falling 2% over the last two weeks as steel mills replenished raw materials before China’s Golden Week holiday, Wang continued, adding production will ramp up due to improved profit margins.

The blast furnace operating rate reached 75.8% on Oct 9, up 0.8% over two weeks, which will support iron-ore demand, she noted. However, futures prices will find it hard to touch CNY900 a tonne in the near term as prices across the ferrous-metals markets have shown a high degree of volatility recently, Wang added. “Upward prices will face strong resistance around CNY845, followed by the next pressure level of CNY900,” she argued. (See MNI EM: China Iron Ore, Steel To Stabilise On Demand Rebound)

The market would consider a price over CNY900 overvalued, a futures analyst told MNI. High inventory will linger, while steel mills are unlikely to replenish their stockpiles in Q4 substantially amid an expected decline in steel demand throughout the year, the analyst added, noting production fell by 5-6% y/y over the first three quarters.