TOKYO -- Prices of iron ore remain lofty as Chinese steelworks boost Australian and other imports to meet strong demand for steel.
The benchmark spot price of Australian ore with 62% iron content flirted with $100 a ton recently, standing 60% above where it was last autumn, or the highest in two and a half years. It has come a long way since sinking below $40 in January 2016.
The sharp rebound comes amid heavy Chinese purchasing. China's imports of iron ore increased 7% last year, topping 1 billion tons for the first time. And the world's second-largest economy shows no sign of stopping, with imports for January up 12% on the year at 92 million tons.
Beijing's fiscal stimulus has been encouraging real estate development, while transportation and other infrastructure projects are in the works. This has kept demand for steel materials solid, helping to greatly improve margins at steelworks. So the facilities are ramping up output -- and that means stronger demand for raw materials. Retail investors are also playing a part in pushing up prices by betting on iron ore in the futures market.
Demand in China is undergoing structural shifts as well. Steelworks there previously used lower-grade local iron ore. But they are starting to embrace ore from Australia and other imports with higher iron content for production efficiency.
Steelworks are also being forced to think green as the government moves to protect the environment. This has resulted in a sustained glut of low-grade ore from China while "users are flocking to high-grade iron ore from Australia and elsewhere," said a trader at a major trading house.
Spot prices show the widening popularity gap. Early last year, the price differential between high-grade 62%-iron ore and its low-grade 58% counterpart came to $5 to $10 a ton. This has since increased to nearly $25. High-grade iron ore, also often used by blast-furnace steelmakers in Japan, is generally less vulnerable to price declines.
But any upside will likely be limited, industry observers say.
Production by resource majors will reach 1.14 billion tons a year by 2020, up 7% from the 2016 level, according to Australian financial services provider Macquarie Group. Current price levels encourage mining companies to ramp up output, since the cost of producing at their primary mines ranges between $20 and $30 a ton.
Chinese traders betting on price increases have been bolstering purchases, resulting in historically high iron ore port inventories. But if demand for steel materials slows or other unfavorable factors emerge amid a rise in production, a supply glut could result once again. A possible scenario played out March 22, when declining steel prices sent the spot price for iron ore down 4%.
Iron ore will slide to a more sustainable level of $50 to $60 a ton in the second half, Macquarie predicts.