Updated June 25, 2017 05:56:36

Photo: The big broker Citi forecasts iron ore could fall to around $US40 a tonne in coming months. (ABC News)

With little inspiration to be drawn from a flat end to the week on Wall Street, ASX futures traders took a punt that this week might start a little higher.

But then again, it was neither a very big nor convincing bet.

The ASX had a poor week compared to its peers.

It fell 1 per cent, while the US edged up, Europe edged down and China was the pick of the bunch up 3 per cent, helped by its partial inclusion in the MSCI index from next May.

Australia's cause was not helped by the barbell nature of its index, with the huge weights of banks and resources at either end.

With the banks facing numerous challenges — now the states are taxing them — and the sentiment for commodities still poor, it is difficult to see where the investment lift will come from.

Iron ore prices heading to low $US40s: Citi

Looking at the trade figures, China still has a pretty healthy appetite for iron ore.

Figures released late last week showed imports in May rose another 6 per cent and are up 8 per cent in the year-to-date.

Iron ore futures gained a tad on Friday and didn't go backwards over the week, while spot prices crept up to two-and-half week highs — near $US57 a tonne.

That is the short term view. Longer term the picture is far bleaker, with another raft of downgrades being made, the most bearish from the big broker Citi.

Citi has cut its spot price forecast for 2018 to $US50 a tonne, but noted in the next six to eight months it could well be mired in the low $US40 range.

Citi's supply balance sheet reflects a 100-million-tonne surplus in China this year, on top a 60-million-tonne surplus last year.

There is a substantial tail-wind in supply with big expansion projects from Brazil's Vale and Gina Rinehart's Roy Hill hitting their straps.

Citi argues only a price collapse will arrest the flood of iron ore hitting China's already over-burdened ports and a price below $US45 a tonne is needed to bring the market back into balance.

Photo: Iron ore and steel prices have recently broken from the long term trend of moving in unison. (Supplied: Citi Research)

One of the interesting dynamics is the sudden and rare divergence between iron ore and steel prices.

Hot rolled coil and rebar prices have remained elevated, largely due to the enforced shutdown of old furnaces.

The capacity constraints may keep steel prices higher a bit longer, but more efficient production is coming on line which will depress prices eventually.

The bigger issue is demand. Citi says growth momentum will slow and steel demand will flatline.

Long product steel, used in real estate and infrastructure sectors, has not grown much this year. Steel wire rod — or rebar steel — demand will take a hit if new apartment investment cools, as expected.

Steel plate production used in ship building and machinery surged in the first quarter, but the sustainability of that trend is questionable, while a new sales tax on small car engines may slow things there as well.

It points to flat demand at best, and nothing to halt the fall of iron ore prices in an already over-supplied market.

Census to look at property demand

In another quiet week on the data front, perhaps the most interesting fresh insight will come from the first release of information from the troubled 2016 census.

The first cut of census data (Tuesday) will focus on housing related questions.

"This should enable economists to update their estimates of underlying demand for dwellings and the scale of pent-up demand — important given the high levels of residential building occurring in the eastern states," NAB's David de Garis said.

The RBA's private sector credit numbers (Friday) will be interesting on two fronts — business lending which has been weak and property lending, which arguably has been too strong to investors.

The regulatory crackdown on the riskier end of the housing market, as well as higher rates on interest-only loans, should have started to bite. If not expect some furrowed brows at the RBA and APRA.

Is inflation in the US on the retreat again?

Overseas, there will be a deluge of opinion from Federal Reserve speakers, with chair Janet Yellen in London, while San Francisco president John Williams is booked in for two speeches in Sydney and one in Canberra.

However, the key point of interest will be the release of the Fed's preferred measure of inflation, core PCE (Personal Consumption Expenditure) on Friday.

The consensus is for another weak number of 0.1 per cent growth month-on-month, down an already unimpressive 0.2 per cent in April.

Not exactly the numbers the numbers the Fed is looking for in its path to raise interest rates back to something like normal.

Rio Tinto's tricky choice

On the corporate front, the giant Swiss-based commodities trading house, Glencore, has thrown a curve ball at Rio Tinto's plans to dispose of it Coal & Allied business to Chinese interests.

Late on Friday, Glencore upped its bid for Rio's Hunter Valley mines to $2.675 billion, $225 million above the agreed offer from China's Yancoal.

The assets on block include Hunter Valley Operations, the Warkworth/Mount Thorley thermal and semi-soft coking coal mines and a major stake in the Port Waratah coal loading facility in Newcastle.

Glencore sweetened its bid with the promise of a swift cash settlement and $225 million deposit that would be forfeited if regulators didn't like the idea.

Sounds simple really. The problem for Rio is the risk of upsetting China.

Relations between Rio and its biggest customer have been somewhat uncomfortable since Rio's former head of iron ore in China, Stern Hu, was jailed for 10 years back in 2010.

Rio's board is currently mulling over things and will give an update ahead of the planned general meeting in London called on Tuesday to vote on the sale to Yancoal.

If Rio decides to take Glencore's money and run, the meeting will be adjourned without ever starting. The reaction to any snub in China would be interesting.

Australia

Overseas

Topics: company-news, stockmarket, currency, australia, european-union, united-states

First posted June 25, 2017 05:32:24