Photographer: Nadine Hutton/Bloomberg

Iron Ore Powers Toward $60 as Rally in Steel Fires Up Demand

  • Prices advance to highest level in a month, up 36% this year
  • Itau Unibanco's Passos says gains will prove to be temporary

Iron ore has surged toward $60 a metric ton, climbing to the highest level in a month, as purchases from steel mills in China picked up amid improving profitability in the world’s largest user.

QuickTake Iron Ore Wars

“Mills’ margins have risen to levels not seen in years and the market expects steel production to recover strongly, boosting demand for iron ore,” said Zhao Chaoyue, an analyst at China Merchants Futures Co. in Shenzhen. “As margins are very high currently, mills have an incentive to build steel inventories. They’re also more willing to accept higher iron ore prices.”

The advance this year has surprised many forecasters, who’d expected a fourth year of losses driven by rising low-cost supply from the world’s top miners and a weakening of steel demand in China. The raw material has rallied as Chinese policy makers including Premier Li Keqiang signaled that they’d support economic growth, and data this week showed the producer-price index snapping a two-year streak of decreases. At last month’s National People’s Congress, Li said this year’s growth target would be 6.5 to 7 percent.

‘Demand Recovery’

“What we are seeing is signs of genuine demand recovery in China, PPI turning positive, construction activity starting to improve,” said Paul Gait, senior analyst at Sanford C. Bernstein & Co. in London. “Li’s speech at the NPC seems to have catalyzed the growth engine once more. Add to that, re-stocking at some of the mills.”

Ore with 62 percent content delivered to Qingdao in China advanced 4.6 percent to $59.22 a dry ton on Tuesday, taking gains this year to 36 percent, according to Metal Bulletin Ltd. Futures in Asia were mixed on Wednesday, surging in Dalian and dropping in Singapore, as miners’ shares rallied, with Rio Tinto Group jumping 4.9 percent in Sydney.

Steel prices have rebounded, aiding mills’ margins. Reinforcement bar, used in construction, has jumped about 32 percent in 2016 after five years of losses, with futures in Shanghai closing on Tuesday at the highest level since June. Hot-rolled coil futures have also soared.

Data this week that showed the first on-month increase in factory-gate prices since 2013 have added to signs of improvement in Asia’s largest economy, which has also seen rising property prices in some bigger cities. Chinese mills are the largest buyers of seaborne iron ore and account for about half of global steel supply.

Axiom’s Outlook

There are still plenty of bears predicting that iron ore’s rally won’t last given prospects for additions to low-cost mine output and expectations that steel consumption in China will still drop in 2016. An increase in supply and higher China port inventories in recent weeks suggest that downward price pressure is imminent, Axiom Capital Management Inc. said in a note on Monday.

Australia’s Fortescue Metals Group Ltd., the world’s fourth-biggest iron ore exporter, said on Wednesday that it may beat its full-year shipment guidance after its cargoes expanded 6 percent in the three months to March. Separately, China’s customs administration reported the country’s imports rose 6.5 percent to 242 million tons in the same period.

Steel production and demand are expected to contract in China this year as policy makers including Li pivot away from heavy industry. Data on economic growth in the first quarter, as well as industrial production, including output of crude steel, are due for release on Friday.

The price rebound is a consequence of a more favorable macroeconomic environment, with less risk aversion and a weaker dollar, according to Artur Manoel Passos, an economist and commodity analyst at Itau Unibanco Holding SA in Sao Paulo, who expects prices to average $46 this year as the surplus widens. “The rally is unsustainable,” he said.

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