Iron ore is on fire

Picture: Getty Images

The spot iron ore price continued its spectacular rally on Monday, closing above the $50 a tonne level for the first time since October 27 last year.

According to Metal Bulletin, the spot price for benchmark 62% fines jumped by a further 6.2%, or $3, to $51.52 a tonne, taking its gain from February 15 – the day Chinese markets resumed from the week-long Lunar New Year holiday – to 18%.

The gain in the spot price coincided with a sharp rally in Chinese iron ore and rebar futures on Monday. Iron ore futures leapt by 4.88%, outpacing an equally impressive 4.31% gain in rebar.

Both closed limit up for the session, meaning the price could not rise any further based off established contract specifications.

On the back of the continued surge in futures, the benchmark spot price has now risen 18.2% year to date, extending its gain from the all time record low of $38.30 a tonne struck on December 11 last year to an amazing 34.5%.

It has been a stunning recovery, and one that few thought possible given deteriorating supply-demand dynamics seen in recent years.

Despite the strong recovery in the price many, including Australia’s top steel producer, believe that the rally is unlikely to last.

Paul O’Malley, CEO of Australia’s BlueScope Steel, told markets yesterday that the spot price was still more likely to move lower, rather than higher, due to increased seaborne supply and tough operating conditions for steelmakers globally.

“[Iron ore] is more likely to go down than to go up, both on the fact of increased supply coming on in the market and on the fact that the whole steel industry globally is struggling to make money,” O’Malley told investors following the release of Bluescope’s H1 profit report on Monday. “More mills will close down.”

O’Malley’s view is shared by Daniel Hynes, Paul Deane and Anurag Soin, members of ANZ’s commodity research team, who point to persistent weakness in China’s steel industry, along with past seasonality trends, as reasons to be cautious.

“Steel demand from China’s housing sector remains weak, with the China steel industry PMI still indicating a weak outlook,” said the trio in a research note released on Monday. “Production cuts remain few and far between, particularly in China where steel output is only 3% lower than peak levels in the past couple of years.”

“Seasonality trends indicate weakness in import demand and prices one to two months after the Lunar New Year. Therefore, we aren’t extrapolating recent strength in iron ore prices as an end to the price weakness just yet.”

Hynes, Deane and Soin believe that the recent price rally has been supported by “some tentative restocking” from Chinese mills.

Recent port closures in Brazil and Australia, the two largest sources of seaborne supply globally, may have also contributed to the rally in their opinion.

Whatever the reason, the sudden rebound in the iron ore price has delivered an unexpected boon to Australia’s budget bottom line, particularly given Treasury’s decision to downgrade its iron ore price forecasts for the 2015/16 financial year to US$39 a tonne (FOB) at the mid-year economic and fiscal outlook (MYEFO) in December last year.

At its current level, stripping out freight costs, the iron ore price is currently around $8 above Treasury’s forecasts.

Economists estimate that each $1 increase in the iron ore price results in around a $300 million boost to tax revenue for Australia.

For a government looking to narrow its fiscal deficit, the rebound in the iron ore price, if sustained, will no doubt help that process.

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