Expectations of further Chinese stimulus lifts hopes of return to $US120/t prices for iron ore

Rumours of iron ore’s price demise have been greatly exaggerated, according to some analysts, who now see a stellar reversal of fortune for the steel-making ingredient back towards $US120 a tonne.

At least in the short term.

That faith has been restored thanks to the stimulus bounty bestowed by Chinese authorities desperate keep the economic fires burning during what the world’s biggest steel maker last month predicted would be a “severe winter” for the Middle Kingdom’s industry.

The price of iron ore is still rising following two sharply weekly gains on speculation China’s top economic planner will unveil more stimulus measures — perhaps as early as Tuesday.

Prices jumped almost 3 per cent in Singapore on Tuesday morning to almost $US112/t after surging 18 per cent over the previous two weeks.

Analysis from Citi expects it to hit $US120/t, with the tailwind of more stimulus to also lift copper to $US10,500/t.

“We expect policymakers to support the market and sentiment further with the announcement of additional measures,” said Citi analyst Tom Mulqueen, according to the Australian Financial Review.

“Market expectations are already high, especially in the onshore share market, where frequent policy announcements could spur further short covering.

“The next couple of weeks remain a key test of whether Beijing is determined enough to break the austerity trap.”

Morgan Stanley is also bullish, saying the stimulus announced so far has “released four months of pent-up pressure on iron ore prices from weakening sentiment”.

“While the impacts on physical demand are less clear, we think the shift in policy, particularly towards property ... suggests further upside is in store,” its analysts said in a note.

“The latest stimulus strikes us as an important pivot for sentiment, at a time when demand is seasonally improving; the rally likely has further to run.”

They said iron ore’s dive below $US90/t last month had “undershot” fundamentals and the recovery had driven prices above its own $US105/t first-quarter target.

The briefing by China’s National Development and Reform Commission on Tuesday is expected to involve announcements on more public spending.

Beijing unleashed a slew of support measures — including interest-rate cuts and targeted support for the property sector — late last month, driving sharp gains in global metals prices.

A week-long public holiday in China that started last Tuesday has meant there have been no more official announcements. Chinese industry delegates to LME Week said they believed that the policy package represented a significant shift by authorities to place more emphasis on reviving economic growth.

There’s a “prospect of further gains when Chinese markets reopen on Tuesday,” ANZ said in a note.

“Any sustained pick up will likely hang on more concrete details” of the fiscal stimulus measures that Beijing promised, it said.