Iron ore price surges

The market turned

The price of iron ore soared on Monday with the Northern China 62% Fe import price including freight and insurance (CFR) adding 5.6% to $45.60 a tonne according to data from The Steelindex.

The steelmaking raw material has gained 6.3% in value so far in 2016 hitting its highest level since mid-November. The price declined to a near decade low of $37 at the end of last year, but after today's advance it's firmly back in a bull market, generally defined as a more than 20% move from a low.

The latest leg up came after Chinese iron ore imports continued to impress with January cargoes of 82.2 million tonnes, down from December's giant tally but up 4.6% on a year on year basis.

A decline from the record setting pace in December of over 96 million tonnes was expected due to seasonal factors and the slowdown ahead of Chinese new year holidays. Cargoes for the whole of 2015 also set a new record of 952.7 million tonnes, up 2.2% compared to 2014.

Domestic Chinese producers which struggle with low grades and high production costs have been gradually pushed out of the market and replaced by imports. Imports now represent nearly four-fifths of Chinese steelmakers' iron ore supply.

Many Chinese mines are also staying open only because of support from local governments pressured to keep jobs safe, but Beijing's stated policy of trimming overcapacity in its heavy industry means more mines will be closing.

The country's miners produced some 350 million – 400 million tonnes a year on a 62% Fe-basis in 2014, although reliable stats are lacking (this figure is calculated working backwards from pig iron production). According to some estimates domestic output has now fallen below 200 million tonnes with further declines likely.

Analysts are skeptical about the longevity of iron ore's rally and point to the fact that Chinese steel production (nearly half the global total) is set to decline further in 2016 after last year brought to halt three decades of unbroken growth.

A supporting factor in the recent run-up in the price has been the temporary closure of Australia’s Port Hedland and Dampier ports due to adverse weather. The Pilbara ports represent nearly 30% of the global trade. At the same time the suspension of activities at Vale’s Port of Tubarão – responsible for roughly 8% of global shipments – also boosted prices.