Chinese buying spree pushes iron ore price to 15-month high
The benchmark price for the bulk commodity was trading at $US158.50 on Wednesday, helping keep the Australian dollar strong at about $US1.05.
The surge underlines the volatility the world's largest consumer of iron ore imparts on the commodity's price. Iron ore slumped at an alarming rate to $US86.70 a tonne just last September as Chinese steel producers pared back their inventories as an industry-wide crisis threatened to take hold.
Now anticipating steadier economic conditions in China, the same steel mills are aggressively restocking, pushing the iron ore price more than 80 per cent higher in barely four months.
But despite the recent surge, Credit Suisse analysts are tipping the iron ore price spike to be merely "one last hoorah", with the initial buoyancy at the start of this year to give way to a "gradual price fade" towards $US90 a tonne by 2015.
It says commodity prices were likely to remain strong for the next few months, but to begin to retreat by the second half of the year. The prediction is consistent with a huge expansion of iron ore supply expected to come online in the coming years.
"For this commodity, the long boom is fading," the investment bank said in a research note. "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."
Credit Suisse's projection is not far off the lows of $US86.70 a tonne seen last September, which pushed higher-cost producers, including Fortescue, dangerously close to the brink.
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.
A series of worrying economic data for China last year looked to have taken a positive turn by the year's end, but economists will be keeping a close watch on a slew of fresh data due for release next week.
Statistics from the China Iron and Steel Association showed that major Chinese steel makers returned to profits in November for the first time in four months.
But Chinese steel analyst Xu Guangjian said the local industry was still struggling.
"Most steel companies are just breaking even," Mr Xu said.
Frequently Asked Questions about this Article…
The article says a buying spree by Chinese steel mills restocking inventories pushed the benchmark iron ore price to about US$158.50, a 15‑month high. Expectations of steadier economic conditions in China led mills to aggressively buy, driving prices more than 80% higher in roughly four months.
According to the article, the higher iron ore price helped keep the Australian dollar relatively strong — around US$1.05 — because iron ore is a major Australian export and improvements in commodity prices typically support the AUD.
Analysts are divided. Credit Suisse warned the spike may be “one last hoorah” and expects prices to remain strong for a few months but to begin retreating by the second half of the year, fading back toward about US$90 a tonne by 2015 as new supply comes online.
The article highlights a large expansion of iron ore supply expected to come online over the coming years. Credit Suisse says that new supply, combined with the fading long boom, could cause prices to ebb back toward their long‑run mean.
The article notes the previous slump to US$86.70 last September pushed higher‑cost producers, including Fortescue, dangerously close to the brink. Credit Suisse predicts some higher‑cost producers — especially Chinese private miners — could be forced to close if prices fall again.
The article recommends watching upcoming Chinese economic releases and steel industry data. It points out that the China Iron and Steel Association showed major steelmakers returned to profits in November for the first time in four months, but fresh data could change the outlook.
The article says major Chinese steelmakers returned to profits in November, which supports demand for iron ore. However, steel analyst Xu Guangjian cautioned the industry is still struggling and that most steel companies are just breaking even, signaling demand could remain fragile.
Key risks highlighted in the article include high price volatility driven by Chinese demand, the possibility the current rally is temporary (Credit Suisse expects a fade), a large incoming supply expansion that could lower prices, and stress on higher‑cost miners. Investors should monitor Chinese demand data and commodity supply forecasts before investing.
Call 1300 880 160
Start a chat
Schedule a call
