Iron ore, a key source of profits for some of the world’s biggest mining companies, has hit its highest level since April as China’s vast steel industry continues to run at a red-hot pace.
Chinese imports of the raw material are on track to exceed last year’s record of 1bn tonnes as steel mills crank up output in an attempt to profit from high domestic prices.
On Monday, the most actively traded steel futures contract hit a four-year high in Shanghai as consumers stepped up purchases ahead of looming production curbs.
Beijing has ordered steel producers in four northern provinces to lower output this winter as part of an effort to cut chronic air pollution.
“With Chinese steel margins at multiyear highs, iron ore demand could continue to surprise,” said analysts at JPMorgan.
Along with coking coal, iron ore is one of the key ingredients in steelmaking. As Chinese mills look to run at full capacity they are increasingly turning to higher grade ores with iron content of 62 per cent and above to boost production.
This is a boon for big suppliers such as Brazil’s Vale, BHP Billiton and Rio Tinto, which last week announced plans to return $3bn to shareholders in part because of booming iron ore prices.
Since falling to $53 in May, iron ore has surged by more than 40 per cent on the back of strong Chinese demand but also subdued supply growth.
Chinese steel production increased 4.6 per cent in the first half of this year, the fastest rate of growth since 2013, while Vale and Rio have both trimmed full year production guidance.
Benchmark Australian ore with 62 per cent iron content was up 3 per cent at $76.10 a tonne on Monday, according to an assessment from the Steel Index.
Chris Mawe, the chief financial officer of Ferrexpo, a London-listed iron ore producer, told the Financial Times last week that he expected demand for high grade ore and pellets to remain strong as China’s steel industry invests in larger blast furnaces that are less polluting.
“The mills we are speaking to in China are reporting much [more] stringent controls on emissions . . . and much higher specifications for the steel they produce which really compels them to use higher grades of iron ore,” he said.
Ferrexpo produces pellets with 65 per cent iron content from mines in Ukraine. Over the first half of the year its pellets have traded at a premium of $43 a tonne to ore with 62 per cent content.
“China is demanding pellets as well,” said Mr Mawe.
His comments echoed those made by Jean-Sébastien Jacques, the chief executive of Rio. After announcing the biggest interim dividend in the company’s 144-year history last week, Mr Jacques said the yawning price gap between high and low grade ore was likely to persist.
“There is no doubt in my mind that China will restructure its steel industry . . . and the only way for them to do it is by improving the quality of their input material,” he told the Financial Times. “I would not be surprised if the gap between high and low grade ore is a structural shift,” he added.
That view, however, is not shared by producers of lower grade material. Fortescue Metals Group and others believe the preference for high-grade material will decline as Chinese steel margins revert to more normal levels.
Source: Financial Times