Iron Ore Powers Back Above $50 as Whipping Boy of 2015 Rebounds

  • `There is a bit more optimism in the air,' Kirchlechner says
  • Prices rally even as banks expect further losses on supplies

Iron ore, the whipping boy of commodities last year as world supply overwhelmed demand, has clawed its way back above $50 a metric ton.

Ore with 62 percent content rallied 6.2 percent to $51.52 a dry ton on Monday, the highest level since Oct. 27, according to Metal Bulletin Ltd. The commodity has jumped 18 percent this year after plunging to $38.30 in December, the lowest in more than six years.

“There is a bit more optimism in the air -- a clear contrast to November and December, which had a distinct graveyard atmosphere,” Philip Kirchlechner, Perth-based director at Iron Ore Research Pty, said by e-mail ahead of the figures. While prices were tough to predict, a range of $45 to $55 seemed reasonable for the first half, he said.

This year’s recovery contrasts with the 39 percent drop last year, when surging output from the largest miners including Rio Tinto Group, BHP Billiton Ltd. and Vale SA spurred a glut amid shrinking steel demand in China. In 2016, prices have advanced as Chinese mills started to ramp up steel production after February’s Lunar New Year break, while mainland miners have scaled back, lessening competition for seaborne ore.

‘Major Factor’

“One major factor is the exiting of high-cost Chinese ore production,” said Kirchlechner, a former chief iron-ore representative for Rio in Shanghai. “There is some excitement, partly by demand for construction steel. Construction is expected to pick up again as weather improves.”

Prices have also rallied due to an easing in the pace of exports from the top suppliers. Shipments from Australia’s Port Hedland, the largest bulk-export terminal which handles cargoes for BHP as well Fortescue Metals Group Ltd., fell 10 percent in January from December. In Brazil, Vale said last week that it shipped less in the fourth quarter than the preceding period. BHP and Vale have also lost output from a joint venture, Samarco Mineracao SA, after a dam burst in November.

In China, which accounts for about 50 percent of global steel supply, benchmark steel prices have also climbed, bolstering mills’ margins. Rebar, used in construction, closed at 1,962 yuan ($301) a ton on Monday after closing at a record low of 1,626 yuan in November.

World Bank

Iron ore’s renaissance so far in 2016 stands in contrast to forecasts for further losses as steel production in China was expected to contract further while low-cost supply rises. The World Bank has predicted prices may post the biggest drop among metals this year, and Sucden Financial Ltd. said this month recent gains may prove fleeting.

In January, Citigroup Inc. raised the possibility that iron ore could sink below $30 a ton, and Goldman Sachs Group Inc. has said prices will stay under $40 through 2018. Earlier this month, Australia & New Zealand Banking Group Ltd. forecast it will drop to $35 at the end of March.

The rebound has taken place against a backdrop of elevated port stockpiles in China. The inventories climbed to 95.55 million tons on Friday, the highest level since May 2015, to head for a sixth monthly increase, according to weekly data compiled by Shanghai Steelhome Information Technology Co.

Hours before iron ore moved back above $50, Australia’s largest steelmaker said that given the outlook for higher mine supply and further steelmaker closures, prices were more likely to drop than to gain. “More mills will close down,” said Paul O’Malley, chief executive officer at BlueScope Steel Ltd.

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