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Iron ore price soars to a record high as China’s steel mills run hot

The price of iron ore, Australia’s biggest export, has surged to an all-time high as aggressive, infrastructure-focused stimulus programs in China fuel booming demand for the key steel-making raw material.

Iron ore’s stunning rally over the past year – which has delivered mega-profits to mining giants BHP, Rio Tinto and Fortescue and helped support Australia’s finances through the COVID-19 crisis – hit a record high of $US193.85 a tonne on Tuesday.

The milestone price, which topples the previous record of $US193 a tonne set in 2011, comes as demand from Chinese steel mills rose in the lead-up to a Labour Day public holiday. Analysts on Wednesday suggested the price may continue to soar even higher and soon cross $US200 a tonne.

“Iron ore prices continue to rally,” analysts at investment bank Macquarie said. “With steel margins remaining positive, there is scope for spot prices to hit $US200.”

Iron ore is Australia’s most lucrative export, last year becoming the first of any Australian product to top $100 billion in yearly export earnings. The price of the commodity has defied repeated predictions that it was overdue for a fall, and has been trading at sky-high levels for several months as the ramp-up of industrial activity in China post-COVID-19 fuels robust demand at the same time as supply disruptions have affected output from Brazilian iron ore heavyweight Vale.

Federal Resources Minister Keith Pitt said Australia was expected to hit a new high of $136 billion of iron ore exports in 2020-21.

“Iron ore is a big part of the resources sector that is forecast to contribute $296 billion in export earnings this year,” he said.

“In Western Australia, it is carrying the state’s economy through the coronavirus pandemic, providing approximately a quarter of the state government’s revenue.”

According to federal Treasury estimates, a sustained $US10 rise in iron ore prices corresponds to an extra $4.4 billion rise in nominal GDP and $300 million in extra company tax receipts.

Iron ore is combined with coking coal in huge blast furnaces, heated at more than 1000 degrees, to churn out liquid steel. China accounts for roughly half of the world’s steel demand, while Australia is the world’s largest iron ore producer and biggest shipper of the commodity to China.

The Commonwealth Bank’s head of mining and energy commodities, Vivek Dhar, said Chinese steel mills’ profit margins were tracking at their highest levels since 2018 while steel demand “continues to impress” on the back of stimulus measures deployed last year. He said Beijing had allocated RMB 3.75 trillion in special local government bonds in 2020 – a 74 per cent increase from 2019 – which were generally used to fund infrastructure projects.

“With policymakers allocating RMB 3.65 trillion in special local government bonds this year, China’s steel demand will likely remain strong, albeit slightly slower than 2020,” he said.

The nation’s third-largest iron ore miner, Andrew “Twiggy” Forrest-backed Fortescue, will report its quarterly production figures on Thursday. Macquarie analysts believe Fortescue is best-placed of the big miners to benefit from the iron ore price’s momentum and are forecasting the company to report quarterly shipments of 44.5 million tonnes of ore.
Source: SMH

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