Mobius Draws Contrast Between Iron Ore's Wild Ride, Fundamentals

(Bloomberg) -- Iron ore consumption in China will probably be sustained as Asia's top economy builds out infrastructure, according to Mark Mobius, who highlighted what he sees as a difference between the industry's relatively stable supply-demand fundamentals and large swings in prices.

“We've got to separate those two things,” the executive chairman of Templeton Emerging Markets Group said in an interview in Singapore, without giving a price forecast. “Supply-demand is one thing, price is another thing. Because the price is subject to all kinds of external factors, and the traders who are betting on the price going up or down or so forth,” he said on Monday.

Iron ore prices have been subjected to a wild ride in recent years -- plunging in 2015, rebounding last year and sinking again in 2017 -- as investors sought to gauge the impact of greater supply and the outlook for steel demand in China. The gyrations have taken place against a backdrop of rising investor interest in futures in Dalian and Singapore, as well as a steady increase in China's import demand and record steel supply. Government policies have influenced prices too, especially last year's stimulus.

‘Straight Line'

“I don't see a big, big decline in the demand for iron ore going forward, I think there'll be continuing demand not only in China but other parts of the world,” said Mobius, who's spent over 40 years tracking emerging markets. “If you look at Chinese imports of iron ore, it's almost a straight line, continuing to go up,” adding that in contrast the price “is going all over the place.”

Prices have certainly been buffeted. In 2017, after charging toward $100 a ton in the opening weeks of the year, they've collapsed back into the $50s last week. Spot ore with 62 percent content in Qingdao was unchanged at $58.50 a dry ton on Tuesday, trading near the lowest since October, according to Metal Bulletin Ltd. In 2016, they swung from below $40 in January to above $80 in December.

China's steel industry accounts for about half of global supply, and its mills buy about two-thirds of seaborne cargoes, mostly from Australia and Brazil. Imports have expanded steadily, topping 1 billion tons last year from 953 million in 2015 and just 70 million back in 2000, customs data show. The top user supplements overseas purchases with output from local mines.

Miners have noted the rising significance of derivatives in shaping swings in prices, with Rio Tinto Group attributing the surge in trading partly to speculators betting on China's growth. Goldman Sachs Group Inc. has said the contracts in Singapore have more pricing power than those in Dalian.

With prices set for a third monthly loss in May, some analysts see more declines. Capital Economics Ltd. has forecast iron ore will ease to about $50 a ton by year-end, and Marex Spectron warns it may sink into the $40s. Still, Casper Burgering, an economist at ABN Amro Bank NV, predicts $65 to $70.

Steel Demand

Mobius said that he expected steel demand in China to keep on rising, albeit at a slower pace than in earlier years. That outlook is echoed by optimism at some of the top miners, with BHP Billiton Ltd. and Rio both saying in March there's potential for more growth in China's steel production.

China's infrastructure spending, including the ‘One Belt, One Road' plan, may offer a new impetus. The initiative to revive ancient trade routes connecting the nation with Asia and Europe is backed by about $900 billion worth of investments and has the potential to generate about 120 million tons of crude steel demand, Citigroup Inc. estimated this month.

“There may be a slowdown in demand from the housing sector but the infrastructure sector will still be sustained,” Mobius said. “If the One Belt, One Road program proceeds, there'll be continuing demand.”

--With assistance from Karolina Miziolek and Anand Menon

To contact the reporter on this story: Jasmine Ng in Singapore at jng299@bloomberg.net.

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, Jake Lloyd-Smith