For investors wondering about the current divergence in iron ore and steel prices, Citi Research has just issued a call. Iron ore will head even lower.

The divergence in prices between the raw materiel and the end product is linked to Chinese blast furnace utilization reaching near-term peak demand for iron ore, just as demand falls on low scrap steel prices, the bank explained in a note released on Sunday.

In the last two months, iron ore prices have been moving down while steel prices, in particular rebar, have moved up.

Such an opposite pattern has only occurred once in the last five years, when iron ore prices declined sharply while steel prices rallied in the second quarter of 2015, the bank’s analysts noted.

Iron ore prices are now around $55 per ton, down from Citi’s calculation of $85 percent ton average in the first quarter of this year. Meanwhile, steel rebar futures on the Shanghai Futures Exchange have risen about 30 percent in the last two months to date.

The run up in steel prices is due to a shortage of steel products after inefficient induction furnaces were shut. However, this is likely to be temporary as there will be enough operating blast furnaces to offset supply losses from the closures and as relatively low steel scrap prices help, Citi said.

Furthermore, iron ore inventories at Chinese ports should peak in the second quarter of 2017 before coming off, but without causing a resultant supply tightness due to falling prices and tighter credit control discouraging over-contracting, the Citi analysts added.

“As a result of this, port inventory levels tend to increase quickly but decrease slowly throughout market cycles,” they wrote.

Global supply is likely to increase with a 100-million-ton surplus in 2017 on top of more than 60 million tons of extra supply in 2016, they project.

The market will need prices below $45 a ton to rebalance, they said.

Citi is revising its price forecast for the next 12 months with spot prices falling to $48 per ton by the fourth quarter of 2017 and to $46 by the first quarter of 2018.

For the next 12 months, Citi is predicting for an average of $61 per ton for 2017 and $50 per ton for 2018-2020.

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