Iron ore has been surging over the past few months thanks to significant global supply cuts.
Earlier this year, prices ended up breaching the $100 per tonne price point, reaching a new 5-year record for the industrial metal. Now iron ore has surged to a new record for the year, breaking the $110 price barrier.
Concerns about dwindling iron stockpiles in China, which is already the world’s largest consumer of the steel making ingredient, helped push the price of iron up even further on Thursday.
The benchmark Australian ore with 62 percent iron rose by 3.5 percent, ending the day at $110.2 a tonne.
Analysts at Jefferies have gone on to say that Chinese steel production has exceeded expectations this year after Beijing eased financing restrictions to help local governments build new public works projects.
This, in turn, is pushing up the demand and consumption of iron, which China had a significant stockpile of in their ports and warehouses. As supplies dwindle, iron demand is going to step up even further.
“Iron ore inventories in China continue to fall and should reach critically low levels in the second half of the year, especially if demand improves due to stimulus,” said Jefferies analyst Christopher LaFemina according to The Financial Times. “Our understanding from industry participants is that the Chinese steel industry would become increasingly concerned as port inventories approach 100m tonnes. If Chinese stimulus leads to better demand, which is becoming a more likely scenario based on recent policy measures, inventories could be at critically low levels sooner than that.”
Currently, it’s estimated that China’s ports have seen their iron stores fall by 28 million tonnes over the past two months, with last week’s estimates sitting at 121.6 million tonnes – around 40 days worth of supplies.
Coupled with the fact that it takes around 30-35 days for an iron ore shipment to reach China from Australia, or even up to 80 days from Brazil, Chinese stockpiles could become completely exhausted over the next month, further pushing up the price.
The shutdown of various major iron mines in Brazil due to Vale’s (NYSE: VALE) earlier dam disaster has seen tens of millions of tonnes get taken out of the global market. While this has been the biggest reason for the iron price surge, other factors are at play as well.
A recent streak of bad weather affecting western Australia, one of the world’s top iron-producing regions, set back production and shipment substantially, leading to further losses in global output.
While this is bad for China, the global supply crunch is great for major mining companies like Vale, BHP Group, Rio Tinto, and Anglo American.
With iron reaching record high prices, these companies are expected to reap substantial profits from this increase, with Vale, in particular, expecting to stage a comeback in revenues despite the shutdown of many of their Brazilian facilities. This is also leading to a surge in investor interest for alternative iron mining areas, such as Newfoundland in Canada.
Over the next month or so, iron ore prices are expected to surge even further, possibly breaking the $120 per tonne mark in the upcoming weeks.