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While China’s announcement that it will crack down on speculation and market irregularities has taken some of the froth out of the iron ore market in recent weeks,   strategists at Capital Economics think the price of iron ore will ultimately be driven even lower by less favourable fundamentals over the rest of the year.

Fundamentals, not regulation, to drive iron ore lower

“While the government’s actions look to have taken a bit of the froth out of the iron ore market in the near term, history suggests that they won’t have much of an influence in the longer-term.”

“We doubt that this current crackdown on speculation will have much of an effect on the price of iron ore over the months ahead. However, we think that market fundamentals point to the iron ore price falling further before the end of 2021.”

“On the supply side, Brazil’s iron ore exports are returning close to the levels seen before the Brumadinho dam collapse, and domestic production in China surged in March and April. Furthermore, while stocks of iron ore held at Chinse ports have been drawn down slightly over the past month, they are still nowhere near the levels that would be consistent with the current iron ore price. Meanwhile the withdrawal of policy stimulus in China, which will probably be felt hardest in the construction sector, should weigh on demand.”

“We expect the price of iron ore to drop back to around $140 per tonne by end-2021, and $120 per tonne by end-2022 as the market shifts into a surplus.”