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Iron ore prices to extend recovery: Economist

Iron ore prices have surged 50 percent this year, prompting speculation that the market may be poised for a fall. Jason Schenker disagrees.

Schenker, president of Prestige Economics, reckons prices will be supported by a broad slowdown in investment at commodity companies and a pick-up in Chinese manufacturing activity.

"For almost a year and a half, Chinese manufacturing has been in recession. That's been huge for iron ore and I think we are going to see that begin to improve," he told CNBC's "Squawk Box".

China's privately-compiled Caixin manufacturing Purchasing Managers' Index showed manufacturing activity expanding in July, having contracted for 16 straight months before that.

Meanwhile, companies ranging from miner Glencore to natural gas producerChesapeake Energy have been slashing capital expenditure to cope with the slump in commodities.

A Chinese steel worker helps load steel rods onto a large truck for transport at a plant in Tangshan, Hebei province, China.
Kevin Frayer | Getty Images
A Chinese steel worker helps load steel rods onto a large truck for transport at a plant in Tangshan, Hebei province, China.

Schenker forecasts iron ore prices at $62 and $72 a ton for 2017 and 2018, respectively. Iron ore prices were around $60 a ton Tuesday.

Although the recovery in Chinese manufacturing would not immediately spark strong demand for iron ore, it would mean that "the bleeding stops and you begin to see a flattening of manufacturing activity," he explained, adding his 2018 price forecast would still be 27 percent below the heydays of $98 a ton in 2014.

Prices however were likely to remain choppy for the rest of 2016 at an average of $60 a metric ton for the second half of 2016, while they will likely average $55 for the full year, Schenker said.

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