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Iron ore extends rally on China steel demand bets

Iron ore surged 6.5 per cent, extending its unexpected rally, amid rising demand for steel in China and optimism about that demand.

Iron ore for delivery to China's Qingdao port jumped $US5.61 to $US92.23 a tonne at its latest fix, the highest since August 2014, according to Metal Bulletin. The spot price rose in line with the futures contract for the steelmaking raw material and amid active trading in the international derivatives market.

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Rio Tinto confident amid iron ore boom

Global miner Rio Tinto put its focus on returning cash to shareholders after beating profit forecasts on the back of cost-cutting and a strong recovery in iron ore prices.

Still, there's now a heightened sense among analysts that iron ore has risen too hard. Prices will fall each quarter this year to $US55 a tonne in the final three months, according to the median of 13 analysts' forecasts compiled by Bloomberg.

"We are sceptical that current prices are sustainable," Capital Economics' Caroline Bain said in an overnight note.

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Ms Bain sees prices falling back to as low as $US50 a tonne by the end of 2017.

Part of the reason for the price doubts are concerns about the continuing strength of China's economy, which has been bolstered artificially by low interest rates particularly positive for both housing and infrastructure. But China this month started to rein in credit, lifting a key lending rate for the first time in six years, seen as another sign that the growth rate of the world's second largest economy is to retreat.

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Meantime, iron ore output is rising as the world's biggest producers, benefiting from lower mining costs, seek to capture as much profit as they can before the party ends. 

Ms Bain said global iron ore production is rising, because of the surge in prices, particularly in India. "We expect growth in iron ore output to rise by close to 3 per cent this year, up from an estimated 1.1 per cent in 2016," she said. "As such, we expect the market to remain oversupplied."

On the Dalian Commodity Exchange, the most active iron ore contract on Monday advanced as much as 5.8 per cent to 706.50 yuan a tonne, its highest since December 2013.

The most-active rebar on the Shanghai Futures Exchange was up 4.1 per cent at 3428 yuan ($US498) a tonne. It earlier in the session touched its loftiest since December last year.

"Mills' booking orders are quite good and they're trying to produce as much as possible," an iron ore trader in Shanghai told Reuters. "People are expecting demand in the (Northern Hemisphere) spring will be strong."

The price surge has been a positive for Australian miners Rio Tinto, BHP Billiton and Fortescue Metals Group in particular. Rio last week reported results that smashed estimates for profits and dividends.

Late last month, Fortescue Metals Group confirmed it is on track to hit the top end of its iron ore export guidance and possibly exceed it, while also continuing to reduce its operating costs.

BHP is scheduled to release its half year results on February 21.

Credit Suisse analysts Paul McTaggart and Christian Prendiville are more optimistic than most analysts. In a morning note, they remain bullish on the iron ore businesses of Rio, BHP and Fortescue.

"For us, iron ore will continue to be a good business," the CS analysts wrote. "The unknown is whether long run returns will be just good versus exceptional."

In their forecast, world steel production will rise 2.7 per cent in 2017 and in light of inventory cycles and latest China trends, "this looks to be conservative", the CS analysts said, adding the latest China data shows steel consumption there was up 8.9 per cent in December on the previous corresponding period and is nearing the high rates of late 2013.

US listed shares of Rio rose 2.7 per cent in New York, extending their year to date advance to 21 per cent. BHP's shares were up 0.9 per cent. More dramatically, Brazillian iron ore producer Vale saw its US listed shares rise 8.4 per cent overnight, lifting its year to date rise to 49 per cent.

Among the unknowns for the outlook, a report overnight said China's environmental authorities are considering whether to curtail steel output from November 2017 to February 2018 to check air pollution that plagues northern China's steel producing belt during its winter season.

According to a draft policy document seen by Reuters, steel and fertiliser capacity would by cut by at least half and aluminium capacity by at least 30 per cent in 28 cities across five regions.

Based on the cuts over three months, the measures would reduce China's total annual steel output by 8 per cent annually and aluminium output by 17 per cent, according to Reuters calculations.

with Reuters