December 02, 2008

Reasons for hike in iron ore prices in China

Prices for both domestic and imported iron ore in China have seen a sharp upswing in 2007. 66% iron ore concentrate at Tangshan, which was quoted at CNY 610 per tonne in August 2006 has gone up by 67.2% to CNY 1020 per tonne and imported iron ore price also increases by 59.5% to CNY 1005 per tonne from CNY 630 per tonne in August 2006.

There are several factors for this situation

1. Steel market revives leading to robust iron ore demand. Against such a backdrop, prices for steel products in home market experience overall revive in July to August 2007 and present strong up trend, especially those for major varieties like construction steel products. This encourages iron ore suppliers to raise iron ore prices.

2. The government tightens control on rectification of ore mines thus decreasing iron ore output. Due to government's control on rectification of ore mines, many small mines have been shut down, decreasing domestic resources.

3. In North China electric power limitation also affect iron ore concentrate output

4. Several blast furnaces will be put into operation in the second half of this year, thus steel makers present robust demand for iron ore concentrate.

5. Some even replenish resource for the winter in advance, further tightening spot supply.

6. Resources in North China flow into South China. China suffered several natural calamities in July. Floods attacked South China, Huaihe River Drainage Area or even North China. On account of floods in South China, southern steel makers strengthened purchasing from North China, especially Northeast China. This also to some extent intensified short supply in North China.

7. Inventories at ports keep declining. As imported iron ore market goes upwards, ports eye nice transactions, increasing enquiries and extremely short supply. Against such a backdrop, shipments appear satisfying and inventories keep decreasing. High grade iron ore resources are in severe shortage. Inventories at 23 ports amount to 43 million tons, among which nearly 10 million tons are Indian ore, which are mainly controlled by several big trading companies, presenting some kind of monopoly.

8. Ocean freight rate hits new records continuously. Rising ocean freight rate also lend buoyancy to spot iron ore market. Statistics show freight rate for Brazil to China averaged USD 27.63 per tonne in 2006 and for Australia to China at USD 11.87 per tonne but so far in this year the figure for Brazil to China has hit USD 62.782 per tonne.

9. As 2008 iron ore benchmark price negotiation approaches, steel makers are busy replenishing resources, further sharpening the insufficient supply.

(Sourced from MySteel.net)