Iron ore enters bull market as China's curbs supercharge steel

(Bloomberg) — Iron ore has rallied back into a bull market. Prices are surging as China’s crackdown on steel output this winter runs down inventories, helping mills’ profitability and stoking demand for high-grade ore even as investors discount signs of ample supply.

 Spot ore with 62 percent iron content jumped 3.7 percent to $72.68 a metric ton, the highest since Sept. 14, according to Metal Bulletin Ltd. That’s more than 20 percent up from the low hit in late October, meeting the common bull-market definition. Earlier, on Monday, futures in Asia rallied, with the SGX AsiaClear prices rising 2.9 percent to $71.29 a ton.
Iron ore’s gains — which will aid miners including Rio Tinto Group, BHP Billiton Ltd. and Vale SA — are buttressed by China’s unprecedented push to rein in steel output this winter to cut pollution. While that initiative may result in less steel being made in the world’s top producer, lowering overall ore demand for several months, it’s also supercharged prices as inventories collapse. Citigroup Inc. has singled out iron ore’s bullish prospects in the first quarter of 2018, raising price forecasts for both next year as well as for 2019.

 “The rally is expected to be driven by a further tightening of the Chinese steel market, Chinese steel mills’ active restocking of high-grade iron ore, seasonally weak seaborne supply, and a recognition that iron ore supply growth passes its peak during the first quarter of 2018,” Citi said in a report that laid out the bank’s views on commodities for the coming year.

As China’s crackdown on mills gathers pace, holdings of reinforcement bar fell 9.4 percent last week to the lowest level in data that stretches back to 2010. At the same time, spot rebar prices have rallied to a multi-year high, and futures in China advanced again on Monday. Those trends are aiding mills’ profitability in the country that accounts for half of worldwide steel production.

‘Strong Margins’

“Buoyed by such strong margins, mills have gone on to restock in earnest, which has played a part in pushing prices up as a result,” said Hui Heng Tan, an analyst at Marex Spectron.

Still, there’s plenty of ore around. Among the signals, port holdings in China are at an all-time high and are large enough to cover more than a month’s worth of imports. Elsewhere, exports from Brazil totaled 34.2 million tons in November, a record for that month, and up almost 9 percent from a year ago.

Miners’ shares rose on Monday. In London, Rio — which announced a new chairman — added as much as 2.3 percent to 35.84 pounds. Earlier in Sydney trading, BHP gained 1.6 percent and Fortescue Metals Group Ltd. added 1.5 percent. The three are Australia’s largest shippers.

China’s drive to clean up its environment, especially the quality of the air, has prompted increased demand for higher-grade ore, exploding the difference in prices between purer and less-pure material. The better quality material, especially 65 percent content, causes less pollution and is more efficient.

Rio Chief Executive Officer Jean-Sebastien Jacques told investors on Monday that the shift in China’s steel sector toward higher-quality, imported ore looks set to endure as mills try to raise productivity. The wider discounts applied to lower-quality products are being sustained and “there’s more and more evidence that this discount or spread is here to stay,” Jacques said.

Story by Jake Lloyd-Smith and Ranjeetha Pakiam with assistance by David Stringer.