Iron Ore's Quiet Comeback Puts Price Back Near $50 as Break Ends

Updated on
  • `The market has become more optimistic,' analyst Zhao says
  • Vale SA's fourth-quarter production drops to miss estimates

Iron ore is making a quiet comeback. Prices climbed to the highest in three months as steelmakers in China start to boost output after the Lunar New Year break and the biggest miners post slower growth in supply.

Ore with 62 percent content rose 2.9 percent to $48.52 a dry metric ton on Friday, the highest since Nov. 11, according to Metal Bulletin Ltd. The raw material advanced 11 percent this week. The resurgence has helped to lift miners’ shares, with Fortescue Metals Group Ltd. up 23 percent in Sydney since Monday.

The recovery contrasts with the run of three annual declines to 2015, when surging low-cost production from the world’s biggest miners including Rio Tinto Group, BHP Billiton Ltd. and Brazil’s Vale SA spurred a glut. China’s steel mills, which account for about half of global supply, may increase production after the Lunar New Year break, supporting demand for iron ore, according to Sinosteel Futures Co.

“The market has become more optimistic about iron-ore and steel demand in the coming weeks as manufacturing activity generally improves after the winter,” said Zhao Chaoyue, an analyst at China Merchants Futures Co. “Still, these are merely expectations. Whether the price rally can be sustained would hinge on downstream demand for steel.”

Vale’s Miss

Vale reported quarterly supply figures Thursday that showed a drop from the previous period, trailing analysts’ estimates. On the year, fourth-quarter output from the Rio de Janeiro-based company rose less than 3 percent.

“The lower output from Vale in the fourth quarter is a signal that supply growth has slowed, which bolsters sentiment,” said Zhao.

While iron ore has rebounded, it’s still trading at a quarter of its 2011 peak and the World Bank has predicted that prices may post the biggest loss among metals this year. The seaborne surplus is estimated at 45.8 million tons this year and 34.1 million tons in 2017, according to Morgan Stanley.

Liberum Capital Ltd. is skeptical that the rally will last and advised investors this week there is now an opportunity to bet against miners. Whilst the expected rate of growth in ore supply has moderated, it remains significant, particularly in the face of a declining demand environment, Liberum said.

BHP rose to 728.50 pence in London from last Friday’s close of 696.60 pence while Rio stock rose 1 percent this week. In Sydney, Fortescue ended at A$1.99 on Friday after gaining to A$2.10 on Thursday, the highest intraday price since November. The trio are Australia’s largest shippers.