Iron ore at risk of losing all of 2016's gains

Iron ore is at risk of losing all of this year's gains. Ore with 62 per cent content has sunk to $48.40 a tonne after posting the biggest monthly loss in about five years in May, according to Metal Bulletin Ltd. The drop has left prices that topped $70 in April less than $5 above 2015's close.

The raw material has been whipsawed this year as signs of a demand revival in China spurred a speculative rally that lifted prices in the three months to April. The climb was reversed after a regulatory crackdown and as supply increased, raising volumes at ports. With output expanding, there's a possibility that 2016 will prove to be another losing year, according to Shenhua Futures Co.

"It seemed clear at the start of 2016 that iron ore was set to face another challenging year but the outlook has since been muddied by the surprise rally," said Wu Zhili, a Shenhua analyst. "Demand remains weak and supply is still increasing. There's a good chance prices will end the year lower."

Should that forecast prove prescient, 2016 would become a fourth year of lower prices. Iron ore fell in the three years to 2015 as rising low-cost mine supply in Australia and Brazil combined with a slowdown in China to hurt prices. They bottomed at $38.30 in December.

Goldman Sachs Group Inc. has warned the global market faces a rising surplus as miners will increase low-cost supply, while China's steel output slows. The bank predicts prices will drop to $38 in the final three months and average $46 for the year. So far in 2016, prices have averaged about $52.

The inventories at China's ports rose to 100.65 million tons last week, the highest since December 2014, according to Shanghai Steelhome Information Technology Co. Holdings have expanded for eight of the past nine months, just ahead of the period when steel demand usually sees a seasonal slowdown.

Steel prices that gained in April, lifting mills' profit margins and encouraging output, have since retraced. As the margins have shrunk, steel production in China may drop through the third quarter, Singapore Exchange Ltd., the largest clearer of iron ore swaps, said in a monthly market commentary received on Thursday as the exchange's futures advanced.

The purchasing managers' index for China's steel industry in May showed a drop in the gauge of production while inventories of finished goods gained. The overall reading was 50.9 from 57.3 in April, with 50 the dividing line between expansion and contraction. The country makes half the world's steel. "There is no doubt the surge in activity in the steel industry has eased in the past few weeks," said Daniel Hynes, senior commodity strategist at Australia & New Zealand Banking Group in Sydney. "However, it remains above 50, and we believe the seasonal slowdown will be less severe this year."