Iron ore has seen a price resurgence as China shuts down its high-cost mines and announces upbeat manufacturing data.
After dipping to two-year lows of $US89 a tonne in June, the steel making ingredient is now fetching $US96 a tonne.
This still represents a 30 per cent drop in the value of iron ore since the start of the year, but has many optimistic the commodity may be in for a bullish phase.
Speaking at Port Hedland yesterday where BHP exported its one billionth tonne of iron ore to Japan, the company’s marketing boss Mike Henry said the price was being buoyed by the closure of high-cost mines in China.
Henry said this made room for 30-40 million more tonnes of iron ore demand, The Australian reported.
This is a view also held by Citigroup analyst Ivan Szpakowski who said that high-cost mine closures means a new wave of low-cost supply flooding the seaborne market will be more easily absorbed.
Vale, Rio Tinto, FMG and BHP Billiton are expected to add an extra 111 million tonnes this year.
"Imported ore is much cheaper than domestic ore, so the shift in buying has moved to imported ore. That is supporting imported prices,” Szpakowski told BDlive
According to the China Metallurgical Mining Enterprise Association, between 20-30 per cent of iron ore mines in China have closed, and local production is set to decline by some 310 million tonnes this year.
This keeps the bulls pointing to further price hikes.
"Every ore-producing province has mines shutting down," Szpakowski said.
"We think that prices will continue rising."
Adding to this sentiment is the Chinese manufacturing index which shows activity increased in June with the PMI jumping from 49.4 to 50.8 points.
The reading above 50 means Chinese factories are lifting productivity rather than slowing down, with the government stepping in to ensure growth remains intact.
Reuters reports there is a “mini-stimulus” taking place, with officials ordering the fast-tracked development of projects, and in turn steel demand.
With iron ore prices rising, investors are being kept happy, and stocks are staying steady for now.
Yesterday, Fortescue Metals Group added 5 per cent to its share price and BHP Billiton has added 3.2 per cent.
This is great news for the iron ore sector which saw investors ditch heavily earlier this year, driving some stocks down by almost 45 per cent.
FMG’s chief financial officer Stephen Pearce said the worst is over, and expects the iron ore price recovery to reach $110 and stay there.
“I’m not expecting the (iron ore) price will rebound to the $US140 level anytime soon. But I think it will re-emerge and settle around that $US110 mark … for a period of time as new supply gets digested and as the Chinese domestic market adjusts to where the new pricing points are,” he said.
Pearce, like others bullish about the China story, said growth signs from the country were still highly positive.
“I think people sometimes look at short-term statistics from China and I think that’s a little bit dangerous,” he said.
“In my mind, (it’s) the six-month and 12-month trends that are really more important.
“When you step back and look at those, steel usage is up 6 per cent year-on-year, and that’s pretty healthy. It’s probably higher than what people were anticipating.”