Iron Ore Opens 2017 With a Bang After Flaying Skeptics Last Year

(Bloomberg) -- Iron ore has carried last year’s bullish momentum into the opening days of 2017, with prices rallying amid speculation that China’s demand for overseas ore is set to hold up even as the world’s largest miners including Brazil’s Vale SA bring on new capacity.

In Singapore, SGX AsiaClear futures jumped as much as 6.4 percent to $82.12 a metric ton, the highest level since October 2014, and traded at $81.56 at 4:02 p.m. local time. In Dalian, the most-active contract soared 7.6 percent. Miners’ stocks were fired up, with Rio Tinto Group rising to the highest close in Sydney since March 2015, as Fortescue Metals Group Ltd. added 2.9 percent.

Iron ore has more than doubled since bottoming in December 2015 amid better-than-expected consumption in China after government stimulus. The latest upswing has been supported by signs that policy makers in the world’s top steelmaker are redoubling efforts to clamp down on outdated mill capacity, lifting steel prices and buttressing iron ore. The advance has come even as banks including Barclays Plc outline the case for weaker prices later in the year, and as Brazil’s Vale starts up output at its largest mine.

“One of the major factors driving iron ore prices at present is the greater emphasis by Chinese authorities on high-end steel products,” said Gavin Wendt, founding director and senior resource analyst at MineLife Pty. “The balance of production is shifting toward premium steel products. China requires more imported iron ore from Brazil and Australia to meet its requirements.”

Benchmark Gains

After establishing a foothold around $80, ore with 62 percent content in Qingdao is up 2.1 percent in 2017, according to Metal Bulletin Ltd. Prices that peaked at $83.58 on Dec. 12 were at $80.54 a dry ton on Friday, capping a 5.6 percent gain last week. Last year, prices rose more than 80 percent.

“Fundamentals do not explain the full price movement since last week, and that’s why I think speculation is playing the main role,” said Di Wang, an analyst at researcher CRU Group in Beijing. Steel and iron ore futures climbed last week after the government vowed to continue capacity-cutting measures, with iron ore adding almost 20 percent in 2017.

Record Imports

Figures on Friday showed that China imported a record 1.024 billion tons in 2016, up 7.5 percent from a year earlier, with most cargoes from Australia and Brazil, the world’s top shippers. Purchases last month totaled about 89 million tons, compared with 96.3 million tons a year earlier.

More supply is on the way, and stockpiles at ports in China are already at a record. In Brazil, Vale has been loading the first ore from its new S11D mine since Thursday, according to North Port Operations Manager Walter Pinheiro Filho. The $14 billion venture is the industry’s largest project.

Iron ore is probably destined to retreat later this year as seaborne supply expands and demand plateaus or eases, according to Barclays. Current levels aren’t sustainable, analyst Dane Davis told Bloomberg in a Jan. 12 interview.

“Our key call, and the message we’re putting forward, is that the $80 price level does not represent a new normal for iron ore prices, instead it’s a temporary blip,” New York-based Davis said in an interview. “I’m an analyst, not a psychic. But I do think over time, demand should start to slow down.”

(Updates with Dalian futures gain in second paragraph.)

To contact Bloomberg News staff for this story: Ranjeetha Pakiam in Singapore at rpakiam@bloomberg.net, Martin Ritchie in Shanghai at mritchie14@bloomberg.net. To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, Jake Lloyd-Smith, James Poole

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