Iron Ore Seen Rallying as China Lending Policy May Boost Demand

Iron ore prices may advance as much as 7.4 percent by the end of this year on speculation that further easing of curbs on lending in China, the biggest buyer, will boost demand, according to Commonwealth Bank of Australia.

Prices may average $155 per ton in the fourth quarter from about $140 per ton this quarter, analysts Lachlan Shaw and Vivek Dhar said in a report dated yesterday. Iron ore with 62 percent content delivered to the Chinese port of Tianjin was little changed at $144.30 a ton yesterday, according to a price index compiled by The Steel Index Ltd. Iron ore is measured in dry tons, or metric tons less moisture.

China’s central bank last month reduced the amount of deposits that lenders must set aside as reserves to ease funding constraints and bolster credit growth, spurring iron ore purchases and prices. China is easing restrictions on lending capacity at three of the nation’s four biggest banks after new loans dropped to a four-year low, according to officials at the banks with knowledge of the matter.

“The turning liquidity cycle in China will increasingly support activity and commodity demand through this year and into 2013” and further selective policy easing will help, the analysts wrote. “Combined with challenged supply and some rationing of high-cost Chinese domestic iron ore, we remain constructive on iron ore pricing through 2012.”

Imports gained 9.5 percent to 64.98 million tons in February as purchases resumed after the weeklong Chinese New Year holiday in January. Chinese customs were shut during the weeklong holiday, which ended Jan. 29, delaying clearance of shipments, according to researcher Umetal.com.

Volatile Prices

Prices may remain volatile in the first half of this year as demand slows from Chinese steel mills and the European debt crisis crimps the outlook for global growth, Sam Walsh, iron ore and Australian chief executive officer for Rio Tinto Group (RIO), the world’s second-biggest exporter, said Feb. 18. Prices may be softer in the first half before demand picks up in the second, Anglo American Plc (AAL) said Jan. 27.

China, the world’s biggest steelmaker, increased production by 3.3 percent from a year earlier in February, the National Bureau of Statistics said March 9.

Iron ore prices have advanced 4.2 percent this year after slumping 19 percent in 2011, according to The Steel Index. The price is at the Tianjin port in China, where moisture can represent 8 percent to 10 percent of the weight.

To contact the reporter for this story: Phoebe Sedgman in Melbourne at psedgman2@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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