The Chinese government's attempt to cool the iron ore price has not stopped some experts from predicting another surge as early as next month.
Westpac Banking Corp (ASX: WBC) believes the stars are aligned for the steel-making mineral to rally close to 20% in January to circa US$180 a tonne, reported the Australian Financial Review.
That should keep the BHP Group Ltd (ASX: BHP) share price, Rio Tinto Limited (ASX: RIO) share price and Fortescue Metals Group Limited (ASX: FMG) share price supported in the near-term, even as the iron ore price lost ground for the second day.
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Iron ore price weakness is temporary
Iron ore futures fell 1.9% in Singapore to US$161.10 a tonne, while the price on the Dalian exchange tumbled 5.8% to 1,026.50 yuan (US$156.95) a tonne.
The commodity has fallen 11% in just two days in Dalian after Chinese regulators curbed some trading accounts to stop speculators from trading.
However, Westpac's analysts Justin Smirk thinks demand-supply fundamentals are enough to push the commodity higher.
Diverse tailwinds supporting the commodity
He noted that iron ore inventories at Chinese ports are stuck at cyclical lows. This is despite rising steel production and strong iron ore imports.
Further, the import price of the ore is trading at a significant premium to the locally produced commodity. This signals how strong demand is for imported ore.
"The margins for [Chinese] steel mills have been supported by rising steel prices which is allowing for the ongoing bidding up of input costs," the AFR quoted him as saying.
"With steel prices continuing to lift further through December, and steel inventories (at both traders and steel mills) rising only modestly, it appears that strong steel sales will continue to be supportive of high iron ore prices at least into the first half of 2021."
Growing demand, weak supply
In the year to November, Chinese steel production climbed 9%, according to Westpac. Most of the growth comes in more recent months as China emerged from the COVID‐19 disaster.
The increase compares to the 8% growth in steel output for 2019.
In contrast, supply of the ore has not kept up with demand. Major Brazilian ore producer Vale SA downgraded its output guidance for 2020 and 2021 as COVID hampered its operations.
Brazil and Australia are also entering into the "wet season" and further disruptions to shipments are likely.
While most analysts do not think the commodity can hold at recent highs, the iron ore price looks well placed to spike higher in the near-term.
It's not only the major ASX iron ore miners that stand to benefit. The Deterra Royalties Ltd (ASX: DRR) share price and Mineral Resources Limited (ASX: MIN) share price will also find favour with investors.
