Steelmaking ingredient iron ore surged further on Thursday, rising to its highest level in 15 months and securing its position as the best performing major commodity of 2016.
Caught between slowing demand from China and relentless supply growth, iron ore was expected to endure another tough year. Instead, it has risen 60 per cent, outpacing gold and oil, due to rising Chinese steel prices and supply cuts.
If sustained, the rebound in prices could add billions of dollars to the bottom line of the world’s largest mining companies. Iron ore is key source of profits for companies such as BHP Billiton, Rio Tinto and Brazil’s Vale.
On Thursday, benchmark Australian ore for delivery to China rose $4.40, or 6.8 per cent, to $68.70 a tonne, according to a price assessment by the Steel Index.
The move came as Chinese steel prices enjoyed another big day of gains, rising nearly 9 per cent to their highest level since September 2014.
Increased availability of credit, restocking ahead of the summer construction period and tighter supplies following a string of closures last year are said to be behind the increase in steel Chinese prices.
At the same time, BHP, Rio and Vale have all trimmed their production guidance, helping to tighten a market that has been struggling with a supply glut. Late on Wednesday, Vale said its output in 2016 would be at low end of a previously announced 340m-350m range.
However, most analysts and even some producers believe the rally has gone too far, too fast and are expecting prices to pull back.
Speaking to reporters on Thursday the head of BHP Billiton in Australia said he did not expect the rise in prices to hold for more than a few months because more supply is set to hit the market.
“As you see more low-cost volume come to market, here in Australia as well as elsewhere, you would expect that prices would not be sustained at these high levels,” said Mike Henry, BHP’s head of operations for Australian minerals.
On Wednesday night, Vale said it was aiming to become the biggest supplier of iron ore to China and expects to produce between 380m-400m tonnes of iron ore next year as its giant S11D project comes on stream.
Roy Hill, a 55m tonne a year Australian mine, is also starting to ramp up production, albeit at a slower rate than expected.
Equally the 50 per cent rise in Chinese steel prices — steel reinforcement bars that are widely used in construction are currently trading at $430 a tonne — is also seen as unsustainable.
In its monthly report, the China Iron Ore and Steel Association said the rally could not last because of rising production, which is estimated to have hit 70m tonnes in March, or 834m tonnes on an annualised basis.
“It feels unlikely that the Chinese steel industry is being disciplined and not restarting capacity,” said analysts at Liberum, a London-based broking house, in a report. “Our view for the year remains that demand has been front end loaded, driven by restocking and stimulus speculation, and will taper off.”
For now, though, the major mining houses are enjoying an unexpected windfall from the recovery in iron ore prices. BHP’s net income for its 2016 financial year could rise almost £150m for each extra dollar on the price of the steelmaking commodity.
Source: Next.ft.