Iron ore price rise is 'one last hoorah'

10 Jan 2013 | Sydney Morning Herald
IRON ORE has jumped to a 15-month high in the wake of a buying spree from Chinese steel mills, but analysts are divided over how long the surge will last. The benchmark iron ore price was $US158.50 on Wednesday, helping the Australian dollar stay strong at about US105¢.

The surge underlines the volatility the world's largest iron ore user imparts on the price. Iron ore slumped at an alarming rate to $US86.70 a tonne in September as Chinese mills trimmed stocks.

Now, anticipating steadier economic conditions in China, the mills are aggressively restocking, pushing the iron ore price more than 80 per cent higher in four months.

But despite the recent surge, Credit Suisse analysts are tipping the price spike to be merely "one last hoorah", with the initial buoyancy this year to give way to a "gradual price fade" toward $US90 by 2015.

It says commodity prices are likely to remain strong for the next few months, but begin to retreat by the second half of the year. The prediction is consistent with a huge expansion of iron ore supply expected in the coming years.

"For this commodity, the long boom is fading," the investment bank said. "However, a steady improvement in Chinese demand - and faint stability elsewhere - have created the conditions for one last run-up in iron ore prices before new supply causes them to ebb back towards our long-run mean.

"The plunge in prices in [the third quarter last year] was short-lived but we still believe it signals a turning point for iron ore, with little prospect of a return to previous cycle peaks," Credit Suisse said.

The bank predicts even higher-cost producers, particularly Chinese private miners, will be forced to close and for China's domestic supply to be cut in half by 2015.

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