Iron Leaps Above $60 as China Data, Steel's Rally Boost Outlook

  • Benchmark has climbed 39% this year after three annual losses
  • The rebound isn't expected to last, Capital Economics says

Iron ore keeps on delighting the bulls. The raw material that was battered for the past three years has vaulted back above $60 a metric ton after data from China added to signs that Asia’s top economy may be on the mend and local mills’ expanding margins spurred increased demand.

Ore with 62 percent content delivered to Qingdao in China rose 2.1 percent to $60.48 a dry ton on Wednesday, the highest since March 8, according to Metal Bulletin Ltd. Prices have gained for three days, taking the advance this year to 39 percent. That’s a turnaround from 2015, when the benchmark plummeted 39 percent on a global glut and weakening steel demand in China.

The raw material has staged a surprise rally in 2016 after policy makers signaled they’re prepared to support growth, mills boosted purchases even as port stockpiles climbed, and steel prices advanced. Data on Wednesday showed China’s total exports jumped the most in a year, signaling that the second-biggest economy may be stabilizing.

‘More Willing’

Miners’ shares have surged. Vale, the world’s largest iron-ore producer, climbed as much as 8.4 percent in Sao Paulo to its highest intraday since October. Rio Tinto Group rose as much as 6.9 percent in London after increasing in Sydney trading to the highest since November. Cliffs Natural Resources Inc., North America’s largest producer, increased as much as 6.8 percent to the highest since September.

“As margins are very high currently, mills have an incentive to build steel inventories,” said Zhao Chaoyue, an analyst at China Merchants Futures Co. in Shenzhen. “They’re also more willing to accept higher iron ore prices.”

Mills in China, which account for about half of global production, have been boosting output after the Lunar New Year slowdown in February as property prices in some bigger cities advanced. Rising prices for steel have improved their profit margins, reversing a squeeze from last year.

Profitability Index

Reinforcement bar, used in construction, has climbed 32 percent in China in 2016 after five years of losses, with futures in Shanghai closing on Wednesday at the highest level since June. Hot-rolled coil futures also rallied this year. That helped to lift the Bloomberg Intelligence China Steel Profitability Index to the highest in almost five years.

China’s overseas purchases of iron ore rose 6.5 percent to 242 million tons in the first three months, according to customs data on Wednesday. More steelmakers in China will probably restart output as margins improve, aiding iron-ore import volumes this month, Citigroup Inc. said in a report. Data on economic growth in the first quarter, as well as industrial production, including crude-steel output, are due for release on Friday.

Iron ore’s 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 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, predicting that the global surplus may expand.

Ramping Up

More low-cost mine supply may be on the way this half. Australia’s Fortescue Metals Group Ltd., the world’s fourth-biggest exporter, said on Wednesday it may beat its full-year shipment guidance after its cargoes expanded 6 percent in the three months to March. Australian billionaire Gina Rinehart’s Roy Hill project in the Pilbara is also ramping up output this year toward its 55 million ton a year target.

“We continue to expect both the iron ore and steel markets to be in large surpluses this year, suggesting little in the way of fundamental support,” said Caroline Bain, a London-based commodities economist at Capital Economics Ltd. “We expect iron ore and steel prices to fall back sharply as we move into the second half of the year.”

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