Iron ore price bulls are back

Long held assumptions about the direction and dynamics of the iron ore market have been tested in 2014.

After hitting a high of $158.90 in February, the industry was jolted on March 10, when iron ore suffered the worst one-day decline since the 2008-2009 financial crisis, cratering 8.3% in a single session.

The recovery from there was swift, but by June 16 the steelmaking raw material was sliding again, hitting a near 2-year low of $89 a tonne.

Iron ore has slowly clawed back some of those losses, but remains in danger of trading below $100 on a quarterly basis for the first time since 2009.

On Thursday benchmark Northern China 62% Fe imports retreated slightly to trade at $95.60 a tonne for a 2% gain in July following a positive June that broke a six-month losing streak for the commodity.

After near universal bearishness about the outlook some are calling for a move back above $100. And in short order.

Bloomberg quotes Paul Bloxham, chief Australia economist at HSBC Holdings Plc in Sydney as saying China – which consumes more than two-thirds of the seaborne market – is stepping up purchases:

"Iron ore prices are lifting in part due to a pickup in demand from China. We expect this to continue and for iron ore prices to head above $100 a ton in the near future."

Key national economic indicators in China remain solid. The world's second largest economy expanded by 7.5% during the second quarter which compares to 7.4% in Q1.

The rest of the year could be better still. A preliminary survey showed that China’s Manufacturing Purchasing Manager's Index – a closely followed gauge of economic activity – rose to 52 in July. That's highest in 18 months.

Apart from a demand boost dwindling domestic supply should also help prices. Between 20% – 30% of mines in China have closed down because low quality ore makes mining at these prices levels unprofitable, according to the China Metallurgical Mining Enterprise Association.

According to Credit Suisse 62%-equivalent domestic production will decline 16% to 310 million tonnes this year and drop again in 2015 to 275 million tonnes.

A move back above $100 may not be enough for smaller producers outside China however as the big three flood the market with ore produced at as little $25-$35 a tonne.

Output at BHP Billiton (LON:BHP), the world's third largest producer, jumped 19% to 56.6 million tonnes in the three months to June. The company is on track to produce 245 million tonnes for the year.

Rio Tinto (LON:RIO) boosted production 11% to 57.5 million during the quarter and is on course to up annual production to 290 million tonnes.

After a slow 2013, top producer Vale (NYSE:VALE) is also hitting a higher gear with output rising 13% to 79.4 million tonnes over the same period. Vale's longer term target is 400 million tonnes a year as its giant S11 expansion comes on stream.

Australia's government forecaster predicts that by 2015 top producers will account for 83% or 1.15 billion tonnes of the global seaborne trade, displacing smaller rivals.

Reuters reports a number of miners have already fallen by the wayside including Sweden's Northland Resources, Australia's Cairn Hill and Canada's Labrador Iron Mines:

"Iron ore is fast becoming a big boys game, with little room for the small or marginal producer," says Gavin Wendt of Australian consultancy MineLife.