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Iron-Ore Swaps Climb to 14-Month High on Chinese Growth

Jan. 8 (Bloomberg) -- Iron-ore swaps rose to the highest in 14 months as China’s accelerating economy boosts demand for the raw material at a time when weather conditions threaten to hinder shipments to the world’s largest importer.

January contracts gained 1.3 percent to $152 a dry metric ton, the highest since October 2011, according to GFI Group Inc. China’s economy will expand for at least the next six months, reversing seven straight quarters of contraction, according to 36 economists’ forecasts compiled by Bloomberg. The nation buys about 65 percent of the world’s seaborne iron ore.

Cargoes at the Chinese port of Tianjin surged 78 percent since the start of September when the world’s second-largest economy announced $158 billion in spending on projects from subways to sewers. The spending plans and the inauguration of a new leadership in China are boosting confidence among traders while supply of the raw material is “tight” because of declining shipments from India, said Simon Hardy, a London-based broker of the swaps at SSY Futures Ltd.

“It’s something that pepped the market up a little bit and it’s continued,” Hardy said by phone today. “We’ve had steel prices rising rapidly and constantly and there’s a certain amount of restocking that goes on before a Chinese New Year.”

Ore at Tianjin with 62 percent iron content, the benchmark used to settle swaps, gained 37 percent to $158.50 a ton since the start of last month, according to The Steel Index Ltd. It may advance to $170 within the next several months, Deutsche Bank AG analysts led by Michael Lewis in London said in an e-mailed report today. Steel reinforcement-bar futures traded in Shanghai gained 13 percent since the start of December to 3,998 yuan ($642) a ton.

Shipping Rally

Port inventories plunged 24 percent since the end of August to 72.97 million tons, within 3.4 percent of a more-than two-year low, according to researcher Beijing Antaike Information Development Co. China typically restocks in January before the lunar New Year, according to Kerry Deal, head of iron-ore and bulk derivatives at Jefferies Hong Kong Ltd.

Steel mills in the country, the world’s largest producer, need to import iron ore because domestic mines shut down for the winter, said Jamie Pearce, SSY’s head of iron ore and freight in Singapore. China is experiencing its coldest winter in 28 years, the country’s weather agency said Jan. 6.

Australian Cyclones

At the same time, Tropical Cyclone Freda was the second major storm to hit the South Pacific region last month. Cyclones in northwestern Australia disrupted iron ore shipments last January. The season for the storms in the country that supplies the most iron ore normally runs to April from November.

Trading in iron-ore swaps and options more than doubled last year to 127 million tons, with about 11 million tons changing hands in December, according to The Steel Index. The contracts are used to hedge price swings and bet on Chinese steel demand.

Shipping rates for the commodity may also gain in the “longer-term” because of China’s strengthening economy and slowing fleet growth, according to Deutsche Bank.

The fleet of Capesizes hauling 160,000 tons of iron ore will add 5 percent this year to a record 298.5 million deadweight tons, down from 13 percent growth last year, according to Clarkson Plc, the world’s largest shipbroker. Owners ordered too many ships when rates peaked in 2008.

Daily earnings for the vessels jumped 12 percent to $6,157 today, the biggest gain since Oct. 23, according to the Baltic Exchange, the London-based publisher of shipping rates. That’s still down 58 percent in the past year and below average operating costs of $7,758 a day, accountant Moore Stephens LLP estimates.

The Baltic Dry Index, a broader gauge of commodity shipping costs that includes ships smaller than Capesizes, climbed 3.1 percent to 734, exchange figures show. Panamax rates added 1.9 percent to $5,401 a day, Supramaxes gained 0.1 percent to $7,736, and Handysizes fell 0.1 percent to $6,577, according to the bourse.

To contact the reporter on this story: Isaac Arnsdorf in London at iarnsdorf@bloomberg.net

To contact the editor responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net

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