Iron ore prices are continuing to rally but experts don't expect the price to be sustainable enough for producers to up their capacity.
Chinese iron ore and coking coal futures both soared by their 9-per cent limit on Monday before trimming gains. The most-traded January iron ore on the Dalian Commodity Exchange was up 6.6 per cent at 642.50 yuan($US94) a tonne in afternoon trade after earlier rising as far as 656.50 yuan, its highest since February 2014. Dalian January coking coal was last up 5.9 per cent at 1,628 yuan per tonne after touching a record high of 1,676 yuan.
Spot iron ore with 62 per cent content jumped 7.7 per cent on Friday night to $US79.81 a tonne, rising 22 per cent this November alone. The bulk commodity has gained more than 80 per cent this year and soared 102 per cent since this year's lows, of $US39.51 a tonne, in January.
"There's been a bit more demand, a bit less supply, a bit of restocking which happens pre-winter," says Daniel Morgan, commodities analyst at UBS.
"But the price at the moment is above a sustainable medium-term price. If this price was seen as any way sustainable, you'd get suppliers lifting production."
Producers such as Atlas Iron and BC Iron worked tirelessly last year to reduce costs in order to survive, while prices were plumbing record depths and have enjoyed healthy share price leaps this year as prices recovered. Resource giants BHP Billiton and Rio Tinto have also seen rapid share price hikes.
But most are wary of increasing capacity given the recent price rises have occurred despite an apparent lack of fundamental support.
"A lot of the marginal tonnes which have left this market, let's call it around 200 million tonnes of high-cost suppliers that have exited in the last two years, if this price was to be any way sustained I'm sure they'd re-enter the trade, but they haven't," says Mr Morgan.
All roads lead to China
While Chinese steel demand has exceeded expectations this year, and demand in the last few months has been solid, analysts expect steel output in China to fall in the coming months, placing pressure on the iron ore price.
While many market watchers are certain a Donald Trump presidency would bode well for commodities prices, Mr Morgan says iron ore is largely excluded from that school of thought.
"The United States doesn't import iron ore," he says, adding the structural issues in China's property market and therefore steel overcapacity have not gone away.
"Once we get over this business cycle in China, which has seen stronger steel production and demand for iron ore, beyond that, structural issues could reassert themselves on the demand side and that would lead to weaker prices."
Macquarie Wealth Management points to Chinese authorities taking steps to ward off speculators, which have played havoc with the iron ore price before.
"When the iron ore and steel markets in China last became overheated in May, the government raised trading fees on the Dalian exchange for iron ore and SHFE for rebar, which resulted in a sharp drop in trading volumes and also prices," Macquarie's analysts said in a note.
"This week the government has taken similar measures to ward off speculators amid the quickening pace of price increases."