SINGAPORE – Iron-ore, dubbed by Citigroup as one of the hot commodities of 2016, looks set to cool off. Prices may sag toward the end of the year and into 2017 as supply rises and steel demand fades, the bank said, adding to the list of banks that are calling time on an unexpected rally.

The raw material will average $51 a metric ton in the final quarter and $45 in 2017 under the base-case scenario, analysts led by Ed Morse said in a report received Tuesday. That compares with Metal Bulletin’s 62% content price of $61.23 a dry ton on Monday, and a year-to-date average of $53.59.

“Believe it or not iron-ore, coal are the hot commodities of 2016,” the New York-based bank said in the note, advising that investors “fade them as commodities stumble”. It added: “Don’t expect the strength to last. Structurally the world remains oversupplied with relatively low-cost material.”

While iron-ore has soared more than 40% in 2016 after three annual losses, banks are now queuing up to forecast the likelihood of further weakness ahead, with Morgan Stanley and UBS Group also flagging prospects for declines as 2016 unfolds. Citigroup said that although iron-ore’s strength may persist into October, after that a weakening of demand coupled with rising mine supply would probably hurt prices.

Iron-ore “may face strong headwinds towards the end of 2016 and most of 2017,” Morse wrote, calling it a “darling” of commodities so far this year. “Supply-and-demand balances in 2017 point to lower prices, with Chinese demand deteriorating and new projects by Vale and Roy Hill ramp up further.”

MINE SURPLUS
Prospects for increased supply include output from Australian billionaire Gina Rinehart’s Roy Hill project in the Pilbara, as well as expansions by top shipper Vale SA in Brazil, which is set to start up its S11D project by the end of 2016. Production from low-cost miners remains strong and there are signs of inventories building across ports in China, according to Citigroup.

Morgan Stanley has forecast that prices may tumble back to $40 a ton this half as the approach of winter in China blunts steel demand and output, according to a report earlier this month. In July, UBS said iron-ore’s revival in 2016 has prompted mine restarts, adding to global supplies and potentially helping prices ease into next year.