After the Chinese National Day Golden Week holidays ended, international iron ore prices rose by more than 12% as Chinese traders and steel mills returned to the market.
This wave of purchases marks a change in the attitude of Chinese traders and steel manufacturers. Prior to this, they had widely withdrawn from the market and reduced their inventory. In just two months, the price of iron ore dropped by 36% and fell below US$90 per ton.
Platts data show that the spot market price of Australian iron ore with 62% iron content rose to $120.25 per ton yesterday and rose by 12.4% in two trading days, the highest in nearly three months.
Liberum Capital said that the price rebound is "the first evidence that the activities of supplementing iron ore inventory in the fourth quarter may have started."
This bodes well for major iron ore producers such as Vale, Rio Tinto and BHP Billiton. In recent months, these miners have been affected by the sharp fall in iron ore prices. Rio Tinto shares rose 1.5% yesterday, one of the best performing stocks in the FTSE 100 index.
This also shows that the pessimistic atmosphere that has permeated the Chinese industrial enterprises in the past six months may be dissipating.
“They definitely feel that the government is taking steps to support growth in all areas,” said Colin Hamilton, director of commodity research at Macquarie. "They have become slightly more optimistic, but I will not say they are very excited now."
Liberum analysts predict that iron ore will “reverse (in the next six months) because of the approval of China’s domestic infrastructure projects that will drive demand, as part of the stimulus plan announced in May this year”.
Last month, the Chinese government approved 1 trillion yuan (US$158 billion) in infrastructure spending.
Analysts and industry executives said that the decline in the supply of iron ore also has a supporting role for the market. The decline in supply is due to the fact that falling prices make the higher-cost miners unprofitable.
Rio Tinto said yesterday that according to its analysis, China’s total capacity of 100 million tons of iron ore has become unprofitable, and the global iron ore shipping trade scale is 600 million tons.
South Africa’s Kumba Iron Ore stated that the strike forced the company’s Sishen iron ore mine to suspend production and that the mine’s iron ore production was 40 million tons. Hamilton said: "This situation has made China's marginal buyers worried about purchasing raw materials from the shipping market."
Analysts believe that China's economic growth and slowing construction investment may prevent iron ore prices from returning to the previous peak level of nearly US$200 per ton. Liberum said that "prices may be difficult to maintain for most of this year," the level of more than $ 140 per ton.