Iron Ore Set to Rally as China’s Winter Cuts Domestic Supplies

Iron ore, trading near a 15-month high, may extend the rally in the first half as steelmakers in China, the biggest buyer, seek imports to make up for losses in domestic production because of the coldest winter in 28 years.

Prices may average $130 a ton this quarter before climbing to $135 in the next three-month period, Tom Price, a commodities analyst at UBS AG, said today. The country’s mines have been unable to boost output that was curbed by the cold spell, Credit Suisse Group AG said Jan. 10. Prices may rise to $170 a ton in the first half, Deutsche Bank AG said Jan. 8.

The steelmaking raw material has surged 78 percent since dropping to a near three-year low in September as demand in China rebounded on optimism the world’s second-largest economy is recovering from a seven-quarter slowdown. That offered some respite to producers such as Rio Tinto Group, the world’s second-largest mining company, which posted a better-than-expected fourth-quarter output and said it’s pressing ahead with expansion of its biggest business.

“It’s the hardest time of the year for them to switch to domestic supplies,” UBS’ Price said by phone from Sydney. Production “runs at pretty high rates until about November or December and then starts to buckle as it starts to snow.”

Iron ore with 62 percent content delivered to the Chinese port of Tianjin declined a third day, falling 0.2 percent to $154.60 a dry ton yesterday, according to data from The Steel Index Ltd. The ore climbed to $158.50 a ton on Jan. 8, the most expensive since Oct. 13, 2011. The price averaged $120.58 a ton in the three months ended Dec. 31, according to The Steel Index.

China Supplies

The rally prompted Chinese steelmakers to use more domestic supplies, according to Domestic ore accounted for

84.1 percent of the fines used to process into pellet feed and

28.2 percent of the ore used to produce sinter feed as of Jan. 11, up from 80.1 percent and 26.2 percent respectively reported on Dec. 21, the researcher said in a survey of 60 smaller mills. Pellet and sinter feed are both used in blast furnaces to make iron in steel production.

The advance in prices will stop Chinese steelmakers from rebuilding inventories, according to Hebei Iron & Steel Group and Maanshan Iron & Steel Co. China boosted imports by 8.4 percent to a record 743.55 million metric tons in 2012, according to customs data released Jan. 10. Shipments last month climbed to 70.94 million tons, also an all-time high, from 65.78 million tons in November, data compiled by Bloomberg showed.

Rio’s share of ore production rose to 52 million tons in the three months to Dec. 31 from 51.2 million tons a year earlier, the London-based company said today in a statement. That compares with the median forecast of 50.6 million tons of four analysts surveyed by Bloomberg.

Steel reinforcement-bar futures fell 0.7 percent to close at 3,977 yuan ($640) a ton on the Shanghai Futures Exchange. The average spot price for rebar fell 0.3 percent to 3,739 yuan a ton yesterday, according to data from Beijing Antaike.

Iron ore is measured in dry tons, or metric tons less moisture. At Tianjin port moisture can account for 8 percent to 10 percent of the ore’s weight.

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