This chart helps explain why iron ore prices are rallying

Photo by China Photos/Getty Images

If you are wondering why iron ore prices have been rallying hard over the past couple of months, this chart goes someway to answering your question.

From the Commonwealth Bank, it shows Chinese steel prices overlaid against the cost of the raw materials such as iron ore and coking coal.

Source: Commonwealth Bank

With steel prices rising faster than input costs, Chinese steel mill margins have risen sharply over the past few months, providing an ideal scenario for mills to boost production levels, particularly during a period of strong domestic demand.

That has seen Chinese crude steel output hit record highs in the past two months, underpinning demand for its raw ingredients, including iron ore.

As long as that continues, it’s likely to support iron ore prices, says Vivek Dgar, mining and energy commodities analyst at the Commonwealth Bank.

“We continue to see the iron ore rally gaining momentum in the short run as Chinese steel mill margins remain elevated,” he says.

Dhar says that along with strong profitability for steel mills, iron ore is also finding support from a shortage of medium and higher grade ore in China along with renewed restocking demand.

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