China’s steely appetite props up iron ore prices
It is good news for miners because prices are climbing despite increased supply
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China’s iron ore imports rose by 18% to 77.8 million tonnes in November from a year ago, according to a report in the Financial Times newspaper, explaining why prices have risen despite the sluggish global economy. Iron ore prices have staged a remarkable recovery from a depressed level in July, having gained by 19.2% since then and up by 2.6% from a month ago. It is good news for miners because prices are climbing despite increased supply.
Rising steel output has contributed to the increase in ore prices. In October, world crude steel output rose by 6.6% over last year to 134 million tonnes, with China’s output rising by 9.2%.
It’s no wonder then that mining companies are striking a confident pose. In a recent investor meet, Rio Tinto Plc said it expects China’s steel demand to rise by 7.5% in 2013. It sees the country’s appetite for the metal driven by consumption rather that investment spending.
But supply, too, is expected to increase due to new projects. Here, the companies are pointing to deferral of capital expenditure (most large firms have done this) and also to the difficulties faced by China in extracting the ore domestically.
Brazilian mining company Vale SA also held a recent investor meet, where it said it expects one-third of the seaborne iron ore capacity to only replace depletion in existing capacity. If demand for steel grows as projected, the market should favour producers.
In India, NMDC Ltd is a pure play on iron ore while Sesa Sterlite Ltd, too, has an iron ore business though it is largely dormant due to the ban on mining in Goa and Karnataka. There is some hope that its Karnataka mines will restart operations soon, but there’s no certainty about when that will happen. NMDC has taken a cue from international price trends and hiked its December price of iron ore lumps by 4.7% and fines by 7.7% over their November level.
Whether iron ore prices hold on to gains really depends on whether demand holds up, particularly in China. Supply issues do not seem to be worrying the market at the moment.
For Indian producers, the main consideration is whether the issues surrounding mining get cleared up, enabling an increase in output. When that happens, it will be enough to boost investor sentiment and higher prices will be the icing on the cake.