SINGAPORE – Iron-ore will probably extend 2016’s rally as China takes further steps to stoke growth and the dollar weakens, according to Prestige Economics’s Jason Schenker, whose rare bullish call in the final quarter of last year is turning out to be right.

While the ride may be choppy, the commodity will trade at about $60/t this half and average $55/t in 2016, said Schenker, president of Austin, Texas-based Prestige. That compares with $53 so far. Further gains are in store, with $62 seen in 2017 and $72 the year after, he said in a phone interview.

Iron-ore has soared in 2016, snapping three years of declines, as stimulus and a credit-fuelled property boom in China lifted demand. The upsurge confounded expectations for further losses, and prompted banks from Goldman Sachs Group to Morgan Stanley to revise their forecasts higher. Last October, as iron-ore racked up a double-digit loss, Schenker had predicted a rebound, saying that China’s government would bolster the economy and steel exports from the world’s largest producer would hold up.

'ABSOLUTELY CRITICAL'
“What I attribute my success to is working with the macro factors and the macro story and not losing sight of the fact that China had been in a manufacturing recession for over a year and a half,” said Schenker, who was ranked by Bloomberg as the top forecaster of base metals in the second quarter and who shares top spot for gold with ABN Amro Bank NV. “The macro picture is absolutely critical for commodities.”

Ore with 62% content delivered to Qingdao tracked by Metal Bulletin has risen 39% in 2016, and was at $60.58 a dry ton on Wednesday. The gains have come as the daily rate of steel production in China hit a record, while shipments of steel products held near an all-time high.

The reversal of fortunes contrasts with the bearishness that was widespread toward the end of 2015 and in the opening months of this year. The month that Schenker forecast the rebound, the China Iron & Steel Association warned steel demand was collapsing. Prices bottomed below $40 in December.

Not everything in the October call panned out, including an expectation for further rate cuts in China as the government sought to buttress demand. While policy makers in Beijing did increase fiscal stimulus and allow the currency to weaken, benchmark borrowing costs have been kept on hold.

FED POLICY
This time around, iron-ore may benefit as China continues to stabilise, while in the US, a softening economy prompts the Federal Reserve to switch tack, adding accommodation, according to Schenker. The dollar is going to weaken, which should be supportive for commodities, he said.

“Additional stimulative Fed policy should be supportive of iron ore prices because it does two things: it not only stimulates the US economy, it’s also likely to weaken the greenback,” he said. In China, “it’s quite possible that they may need to engage in more stimulus, especially if we see the US economy begin to weaken further.”