Spot iron ore could slip to the mid-$50s/dry mt as steel prices have stalled and product inventories are showing signs of building, Barclays said in a research note Tuesday.
Barclays said the key signal for the end of the iron ore rally will be "the start of a new steel product inventory restocking cycle," which will remove the impetus for strong steel prices and thus filter into iron ore. Rebar stocks were at 438,000 mt as of August 25, against a high of 874,000 mt in mid-February, the bank said.
Iron ore port stocks have also declined, falling from 145 million mt in June to 135 million mt as of August 25, suggesting mills may be building internal inventories in anticipation of potential transport restrictions during the 19th National Party Conference in September.
Barclays said China's new environmental policy -- reducing steelmaking by up to 50% curb pollution -- will only impact 6.6 million mt of crude output, equating to 2% of China's total production.
In response to any mandated production cuts, the bank said mills could respond in various ways: by over-reporting idle capacity, ramping up high-grade ore usage, or trade electricity quotas with other firms.
"Given this, we believe mills could offset 85% of the output reduction during the heating season," it said.
