Iron Ore Breaks Above $70 as China’s Pivot Helps to Stoke Demand

LAGOS (Capital Markets in Africa) – Iron ore has finally broken above $70 a metric ton. After a crawl higher in recent weeks, bulls drove the price back over that threshold, encouraged by surging steel prices in China, where there’s growing demand for high-quality material aided by state-driven investment and pollution curbs.

SGX AsiaClear futures rallied as much as 1.5 percent to $70.60 a ton, the highest since March, and were last at $70.49. On the spot market, benchmark ore with 62 percent content hit $69.95, according to Mysteel.com, also the highest since March. Top-quality ore with 65 percent content has done better, surging to $96.50, an almost 11-month high.

Since a sell-off in March, iron ore had been confined to a narrow band in the $60s as investors weighed robust steel output against increased mine supply. It’s now broken out of that range to the upside as China’s policy makers seek to boost growth, especially infrastructure, to offset the impact of the trade fight with the U.S. A concerted push to curb pollution has helped too, aiding demand for the best iron ore while crimping some steel production.

“Iron ore prices seem to be on their way up,” CRU Group consultant Erik Hedborg said in an email. “We see the recent price surge as an effect of improved sentiment in China after talks of new economic stimulus that will boost infrastructure spending toward the end of 2018.”

Benefit Miners
Higher prices benefit miners, including Rio Tinto Group, BHP Billiton Ltd.and Fortescue Metals Group Ltd. in Australia, as well as Brazil’s Vale SA. Last month, Vale signaled that it can’t seem to supply China fast enoughwith its clean-burning, high-quality ore that steelmakers mix with lower grades.

Annual steel production in China is on track to rise from 2017 and demand will be supported by stimulus, and the Belt-and-Road initiative, Fortescue Chief Executive Officer Elizabeth Gaines said. That initiative is China’s drive to transform the links between Asia’s largest economy, the region and Africa.

“There’s no doubt that there’s been strong demand,” Gaines told reporters in Kalgoorlie, Western Australia, where she addressed a conference. “Even in the absence of stimulus, we’ve seen that the fundamentals for steel production have been strong,” she said.

Iron ore’s gains amid the trade frictions have set the commodity apart from some other raw materials, especially copper. The red metal — typically seen as a barometer for global growth — has languished in recent weeks, tumbling below $6,000 a ton last month to a one-year low. It was last at $6,184.

‘Remain Elevated’
“Iron ore prices should remain elevated, as China takes a proactive stance on fiscal policy, with demand for higher-grade ore holding up well,” Australia & New Zealand Banking Group Ltd. said in a note received on Tuesday. The bank noted lower iron ore supply from mainland mines, stagnant growth in ore exports from Australia this year, and “robust” steel output in China.

Chinese authorities have been intensifying their clampdown on pollution, slapping a raft of production cuts on steelmaking cities that have propelled steel prices, with rebar at a five-year high. That’s underpinned demand for quality ore, with high-iron, low-impurity content, as steelmakers race to churn out as much hot metal as possible.

Still, CRU’s Hedborg cautioned that the same trade frictions that aided iron ore as China boosts stimulus, also carry risks, pointing to “a high level of uncertainty.” He added: “It’s too early to tell if it is going to have a longer-term impact on steel production and thus iron ore demand. Fundamentally, there is no shortage of iron ore in the market, and the supply of high-grade ore, which is currently in strong demand, is improving in the second half.”

Fortescue’s Gaines also added a caveat about the trade war and its potential impact, flagging an indirect effect on mining if there’s greater volatility in currencies and fuel prices. “We think overall the impact on steel as a result of the tariffs is pretty modest,” she said. “But this period of protectionism isn’t necessarily going to be good for global growth.”

Source: Bloomberg Business News