Iron ore producers soar

Iron ore prices were supposed to plummet as supply began ramping up. No-one factored in the demand.

Against all the odds, iron ore has become the new gold.  

While precious metals continue to sag in the face of what should be perfect bull-market conditions, with the world's biggest economy threatening a potentially devastating debt default, iron ore prices have remained robust as demand from China continues to outpace the increased supply from major producers.

Some of the biggest gains on the market this morning were Fortescue Metals (FMG), Mt Gibson (MGX), Atlas Iron (AGO) and Rio Tinto (RIO). And that followed strong performances yesterday.

Several factors are driving the renewed interest. While a raft of investment bankers have expressed fears that iron ore supply would outstrip demand this year, resulting in a repeat of last year's alarming price slump, demand from China easily has soaked up the excess supply.

Trade figures from China over the weekend had the bears in a lather. The overall numbers were disappointing but imports were strong, particularly iron ore, where shipments to China leapt 14.7%.

It is now clear that steel production in China is outstripping industrial production. And the primary reason for that is the inflexibility in China's steel industry following years of massive rationalisation that has seen most of the small producers replaced by far fewer but much larger steel mills (see TIm Treadgold's China takes metal reins).

Given the expense involved in shutting down large mills, the only leeway steel producers have is in the management of iron ore stockpiles – a strategy used to devastating effect last year when steel producers depleted their reserves.

Rio Tinto's quarterly production report yesterday underscored the robust demand from China with a 14% lift in shipments from the previous corresponding quarter as increased supply from mine expansions were shipped.

The third quarter saw 64 million tonnes produced in the Pilbara operations, which is expected to rise to 70 million tonnes this quarter. Fortescue's production report, out tomorrow, should show a similar trend.

Much to the dismay of analysts, some of whom were forecasting iron ore prices of $US90 a tonne or even lower as the increased supply came on stream, iron prices have remained at elevated levels.

Overnight, they were above $US133 a tonne which translates into higher prices for Australian producers with the domestic currency now sitting around US95c.