• Trade responding to lift in China steel production, Price says
  • Additions to mine supply in 2016 may cap upside, Price says

Iron ore extended a rally above $60 a metric ton as steel prices in China surged amid a drawdown in product inventories, bolstering demand for the raw material as plants step up output in the top producer.

Ore with 62 percent content delivered to Qingdao climbed 4.1 percent to $62.85 a dry ton on Tuesday, the highest price since March 8, according to Metal Bulletin Ltd. The gain follows a 3.6 percent jump on Monday and takes this year’s gain to 44 percent.

Prices have staged a surprise rally in 2016 as steelmakers in China revived output to a record last month after policy makers bolstered growth and the property sector rebounded. The country’s inventories of the alloy are depleting, pushing up domestic prices and boosting mills’ incentive to ramp up supply. The increases in iron ore and steel prices may not endure as higher production of both products may go on to exceed demand.

“The trade is responding to a lift in China’s steel production activity,” Tom Price, an analyst at Morgan Stanley in London, said before Tuesday’s price data were published. Iron ore upside in 2016 may be capped by on-going expansions, including the new Roy Hill project in Australia and by top producer Vale SA in Brazil, he said.

‘Severe Oversupply’

The global iron ore market faces increasingly severe oversupply, according to Citigroup Inc., which said in a report this week that the commodity’s gains will probably be reversed in the second half. Increases in ore production, including from miners that restarted after this year’s rally, will hurt prices in the second half, the bank said.

Rio Tinto Group, the world’s second-largest mining company, reported on Tuesday that first-quarter iron ore production rose 13 percent to 84 million tons from a year earlier. Fortescue Metals Group Ltd. said last week it may beat its full-year export guidance after its quarterly shipments rose 6 percent. BHP Billiton Ltd. will announce output data on Wednesday. The three companies are Australia’s largest shippers.

Iron ore’s rally in 2016 follows three years of declining prices as the world’s largest producers including Rio, BHP and Vale expanded low-cost supply, squeezing competitors and adding to a glut. Combined shipments from Australia and Brazil will rise 9.4 percent this year to 1.2 billion tons, Australia’s government has forecast.

Steel prices in China pushed to fresh highs on Tuesday as rebar futures in Shanghai gained 4.3 percent to the highest close in more than a year. Over time, steel output in China will be raised to a level that tips the market back into oversupply, according to Xu Xiangchun, chief analyst at Mysteel Research.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE