Iron Ore Prices Gain 12 Percent

on Oct 10, 2012

As China’s Golden Week holiday came to an end, iron ore prices surged by more than 12 percent marking the end of a two month downturn that saw the metal slump to $90 a tonne.

**Slowdown in the Metals Market**
Only a month ago Chinese steel traders were desperately looking for good news – steel prices were falling, loans were getting harder to come by and demand remained weak.
The iron ore import market, which is worth more than $100 billion (£63 billion) annually worldwide, is greatly dependent on China which provides 60 percent of global demand. The slowing growth of the BRIC country, a result of the government’s determination to alter its economic development model, hit construction companies and steel mills and buried prices all the way down to $89 a tonne. “Huge production capacity, a bleak market, and meagre profit” was how the outlook for the steel industry was summarized by Wang Qinghai, chief executive of one of China’s biggest state-owned mills.

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**Return to Optimism**
On Tuesday 9 October spot prices for Australian ore with 62 percent iron content increased to $120.25 a tonne and Liberum Capital described the rebound as the “first evidence that a fourth-quarter restocking in iron ore might be under way”. Iron ore prices are still below the $120 mark – a level often quoted to be the floor for the steel-making ingredient.

In addition to the modest increases in demand, iron ore prices were also supported by a drop in supply as strikes in the South African Sishen mine forced Kumba Iron Ore to halt production. The company said on Monday that if the protests continue it would only be able to supply its customers through Mid-October.
!m[](/uploads/story/554/thumbs/pic1_inline.png)“The situation has made the Chinese marginal buyer a little bit worried about sourcing material from the seaborne market,” said Colin Hamilton, head of commodities research at Macquarie.

Chinese Government Moves to Counter Weakened Growth
Analysts expect iron ore prices to rise even further in the coming months as Beijing announced it will be rolling out $158 billion (£98.6 billion) in infrastructure spending. The move was long predicted given the sluggish industrial output but Chinese top leaders have been very cautious as to not overstimulate the economy the way they did back in 2009.

**Iron Ore Miners Cut Costs**
The surge in iron ore prices has been well received by mining companies – Fortescue Metals (ASX:FMG) soared 6.5 per cent and Rio Tinto’s shares (LON:RIO) increased by 2.4 percent. Despite the good news, Rio announced on Tuesday it is going to step up cost-cutting measures because of the uncertain short-term outlook for China. BHP Billiton (LON:BLT), the world’s biggest mining company, is also planning to shed an undisclosed number of jobs in the iron ore business following the previously installed cuts meant to shelve a $20 billion (£12.5 billion) plan to expand its main export facility for the ore in Western Australia state.
Because of the two-month downturn in iron ore prices, mining companies have focused on costs, which are not so important when prices are robust and margins – larger.


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