Iron ore on Monday traded at exactly $120 a tonne – a psychologically important level for the industry and a 38% improvement since hitting a three-and-a-half year low of $86.70 in September.
Iron ore's recovery to triple digits is attributed to high cost mines – more specifically those in China – which become unprofitable when the price stays low for too long. Supply is cut and prices return to these sort of levels.
That's the theory – but the domestic Chinese iron ore industry has not been following the rules of supply and demand. Not even close.
Shanghai-based industry site Glinfo provides details of a new report by MySteel.net and China's Metallurgical Mines Association that show just how unbalanced the domestic Chinese market has become.
Over the first nine months of 2012, China's pig iron and crude steel production reached 503 million tonnes and 542 million tonnes, year-on-year up a modest 2.7% and 1.7%, respectively.
In contrast China's domestic iron ore output shot up 16.6% to 968 million tonnes, while imports jumped 8.2% to 550 million tonnes over same period.
And it's still accelerating – in September Chinese mines churned out 129 million tonnes, up a whopping 20% from last year.
That's despite the fact that the highly fragmented Chinese industry have to deal with cash costs of minimum $80 and for many mines twice that number.
With the dynamics of the industry so out of whack you'd think that a deep cull of mining operations and a slashing of output would be in the offing.
Quite the opposite.
According to the study there are 66 projects with a total production capacity of 490 million tonnes currently under construction in the country.
The new capacity also comes despite a survey that shows the domestic industry losing share against the import market.
A survey of the top 55 steel mills shows that they now import almost 90% of their requirements, up from 70% at the start of the year.
The annual seaborne iron ore trade is just over 1 billion tonnes. Of that almost 60% end up at Chinese ports.
The big three suppliers – Vale, Rio Tinto and BHP Billiton – which completely dominate the global trade mine ore for $40 – $50 a tonne.