Chinese Steel Mills Drive Iron Ore Price Surge

18 July 2016

The forces driving a recent 20 per cent surge in the iron ore price became clearer in recent days as monthly Chinese data revealed the Asian giant’s steel mills are at their busiest ever, despite expectations of a slowdown.

The official June data, coupled with industry data showing steel inventories had fallen, led to reports that underlying steel demand was healthy, despite general market speculation that a slowdown in demand is looming.

The price of iron ore, Australia’s biggest export and the key ingredient in steel, had risen from $US48 a tonne in early June to nearly $60 a tonne.

However, on Friday iron ore fell 1.4 per cent to $US57.80 a tonne .

Even so, the ongoing rise has pushed up the shares of Fortescue by 25 per cent and mining giant Rio Tinto by 16 per cent over the period.

If sustained, the iron ore prices mean official Australian budget forecasts of $US55 a tonne before shipping (which mean about $US60 landed in China) for 2016-17 could be met. However, most analysts think prices will fall as more supply comes on.

The data from China’s statistics bureau showed June crude steel output rose 1.7 per cent from a year earlier to 69.47 million ­tonnes.

While this was down on the monthly record of 70.65 million tonnes set in March, taking into account June was a shorter month, June’s daily rate of 2.32 million tonnes was a record.

On Saturday The Weekend Australian revealed new figures that showed China’s struggling steel mills returning to profitability during the first half of the year.

This will be received warmly by Australia’s iron ore miners and investors, who are basking in the unexpected strength of the price in recent months.

So far this year, Chinese steel output is up 1.1 per cent to 559.9 million tonnes, which has ­provided hope that iron ore industry forecasts of continued growth could prove right, and that 2014 was not the peak for Chinese steel production, as many analysts have predicted.

Steelmaker BlueScope rose further on Friday, closing 40c or 5 per cent higher at a six-year high of $8.25 following a Thursday profit upgrade that had already sent the shares up 7 per cent.

While that upgrade was largely attributed to US steel price gains on the back of anti-dumping measures, Credit Suisse analyst Michael Slifirski said the Asian price outlook was also more positive.

“The recent recovery in steel prices and more positive China outlook may have boosted (2015-16) year-end steel demand as it became clear that steel prices would likely trend up, not down,” said Mr Slifirski, who yesterday boosted his BlueScope target price from $7 to $8.30.

Trade news service Metal Bulletin said steel inventory held by members of the China Iron & Steel Association fell 1.45 million tonnes between June 20 and 30 to 13.23 million tonnes, implying strong downstream steel demand when viewed with the high production rate.

The increased Chinese steel output comes after government stimulus helped growth hold steady at 6.7 per cent in the second quarter, beating expectations of a slip to 6.6 per cent.

In a bid to boost growth, China has flushed funds through the financial system, ramped up infrastructure spending and reduced red tape and corporate taxes.

At current prices, the largest miners are easily able to turn a profit, and some smaller players also have wriggle room.

Fortescue’s break-even price is estimated to have fallen to $US32 a tonne, while Gina Rinehart’s Roy Hill can make a profit with iron ore in the low $US40s.


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