Citi says iron ore prices will fall, downgrades UK metals and mining

Commodity markets were stumbling back to normalcy, Citi analysts said on Monday, but less so in the case of iron ore.

Rising prices for steel and lower-than-expected exports from Australia had led to a 34% rally in iron prices year-to-date, but the rebound was likely to peter out in the backhalf of 2016, a research team led by Ed Morse said in a research note sent to clients.

Both of the above factors were likely to reverse in the medium and long-term, the broker said, leaving the iron ore market facing increasingly severe oversupply.

“Prices may remain high in the second quarter before the rally fades,” Citigroup said.

Morse and his team nevertheless bumped up their average iron ore price forecasts for 2016-2018 to $45, $39 and $38, respectively.

Their prior estimates had called for prices of $39, $35 and $35 in each of those years.

Citi estimated a global glut of the base metal would more than double in 2017 to 38m tonnes, before falling to 14m tonnes in 2018 and then recovring to 44m tonnes in 2019.

In a separate research note, Citi analyst Heath R Jansen told clients that the UK metals and mining sector had "run too hard, too fast and valuations now looked stretched both on absolute and relative basis."

As a result of the above, he downgraded his six-month view on the sector from 'neutral' to 'bearish' but noted the longer-term outlook for the sector had improved.