Iron ore could soon top $100 as Chinese futures surge to record highs

  • The benchmark iron ore price may be about to lift above $100 a tonne for the first time since 2014.
  • Chinese iron ore futures have surged to record highs on Thursday.
  • Supply disruptions from Brazil, record Chinese steel production and improved profitability at steel mills is helping to push prices higher.
  • Iron ore is Australia’s largest goods export by dollar value.

The benchmark iron ore price may be about to break above $100 a tonne for the first time in five years with Chinese futures soaring to record highs on Thursday.

The September 2019 iron ore futures contract on the Dalian Commodities Exchange sits at 676.5 yuan at the mid-session break, up a massive 4.2% from Wednesday’s day session close. It finished Wednesday’s night session at 658.5 yuan, just shy of the previous record high set earlier this month.

Thomson ReutersDalian iron ore September 2019 futures contract. Daily Chart.

“It’s because of some seasonal demand, which is quite strong, with some impact from the supply side,” a Shanghai-based trader told Reuters.

The source told Reuters that steel mills were replenishing their iron ore stocks as good profit margins encouraged them to boost output.

Along with firmer steel prices, supply disruptions as a result of a deadly accident at an iron ore mine operated by Brazil’s Vale in late January has helped to support buying in both physical and futures markets in recent months.

Demand in China, the world’s largest iron ore consumer, is also strong with steel output soaring to the highest level on record in April, according to data released by China’s National Bureau of Statistics earlier this week.

On Wednesday, the price for benchmark 62% iron ore fines jumped 2.8% to $96.95 a tonne, according to Metal Bulletin. Should the gains in Chinese futures be replicated in physical markets, there’s a reasonable chance the price could clear $100 a tonne when Metal Bulletin releases updated information later on Thursday.

Not since May 2014 has the benchmark price traded above $100 a tonne.

Along with being great news for the profitability of iron ore miners, stronger prices are also good news for Australia given iron ore is its largest goods export by dollar value.

In the recent federal budget, Australian Treasury forecast that iron ore prices would average $55 a tonne over 2019/20, excluding freight costs. It’s currently close to double that level.

The higher prices go, the greater the income boost it will provide for Australian government revenues should volumes remain at elevated levels.

“The lift in prices is boosting Australia’s national income, which is flowing through to higher tax revenues, providing the government with additional fiscal flexibility as evident in the recent budget updates,” said Andrew Hanlan, senior economist at Westpac, earlier this year.

Some of that “fiscal flexibility”, as Hanlan describes it, could mean additional tax relief for Australian workers, should it be required.

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