LAUNCESTON, Australia, July 1 (Reuters) – Iron ore prices rose the most in 10 months last week, but hopes that this marks the start of a new bullish phase are likely to be dashed.
Spot Asian iron ore .IO62-CNI=SI ended last week at $94.90 a tonne, a gain of 3 percent from the prior week, with prices bolstered by an improvement in the outlook for manufacturing in China following the June HSBC flash Purchasing Managers’ Index showing expansion for the first time in six months.
Iron ore prices are still down 30 percent from the $134.20 a tonne at the end of 2013, but they have recovered since briefly dropping to a 21-month low of $89 on June 16.
The bullish case for a recovery is largely based on expectations that Chinese domestic production will drop as high-cost mines are forced to close on unsustainable losses. The loss of domestic output will open the door to increased imports, thus absorbing the extra supply being brought online by the major mining houses.
This view is bolstered by the improving outlook for steel demand on the back of faster investment in railway and other infrastructure spending as the authorities undertake what’s been characterised by several analysts as a “mini-stimulus” to ensure economic growth remains above 7 percent per annum.
It does appear that Chinese iron ore mines are closing, with industry website mining.com reporting on June 30 that 20 to 30 percent of domestic mines have been idled, citing the China Metallurgical Mining Enterprise Association.
Domestic output accounted for about 30 percent of last year’s iron ore demand in the world’s largest consumer of the steelmaking ingredient, equivalent to about 350 million tonnes of 62 percent iron ore, the global benchmark.
According to a Morgan Stanley research report on June 12, about 46 percent of this is produced at state-owned mines and the rest at private operations.
The weighted average cost of state-owned mines is $82 a tonne and about $101 a tonne for the private companies, Morgan Stanley said.
State-owned mines are likely to continue producing even as prices fall, given they are more focused on jobs than profits and many are integrated with steel mills, the report said.
However, private mines will idle some output, with Morgan Stanley estimating 64 million tonnes of 62 percent iron ore equivalent could leave the market in 2014.
But this still won’t be enough to offset increases in supply, with the report saying an extra 111 million tonnes will be added this year to seaborne supplies by the big four global miners, Vale, Rio Tinto, BHP Billiton and Fortescue Metals.
Another point worth noting is that if private mines in China have a weighted average cost of about $101 a tonne, this suggests they will return to full production if the price rises significantly above that level.
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