Iron Ore Climbs Again, But Will It Continue?

At the start of March iron ore began to challenge forecasts for a bear market this year. The commodity jumped up 20% on 7 March, to $62.60 per tonne. And what spurred on its climb? Chinese demand.

Iron ore enjoyed something of a bounce after the Chinese Lunar New Year. Chinese steel mills started to stock up for the spring construction season. However, iron ore prices above $60 were not maintained. Prices dropped in the days that followed. Yet the commodity never dropped below $50 per tonne.

Just last week, iron ore was on the move again. It enjoyed a three-day rally, gaining US$4.62, or 8.74%. Spot prices are now sitting around US$57.50 per tonne. Below is the Metal Bulletin benchmark for iron ore spot prices.

Metal Bulletin Iron Ore Index

Source: Business Insider

Speculation shocks prices

The latest iron ore rally was likely spurred on by speculation over both supply and demand. Chinese steel demand has been ramping up in recent weeks. This has led to a substantial pick up in volumes traded in iron ore future markets.

There are hopes China’s property sector will pick up, which has been a factor for the demand increase. But analysts are still speculating on whether iron ore can maintain its run. Doom and gloom still surrounds the resource sector as a whole.

Yet these pessimistic attitudes might be overblown. China is still growing, as are other countries throughout Asia and parts of Africa. Very soon, demand could catch up with supply.

Developing societies requires infrastructure. Infrastructure made to last, with high-quality steel. And nobody is better placed to benefit from this than Australia.

Iron ore prices may remain low in the meantime. But many miners are still betting it won’t last. Australia’s biggest miner, BHP Billiton [ASX:BHP], is planning to mine Australia’s iron ore Pilbara region for 100 years.

BHP said it had lodged a Strategic Environmental Assessment (SEA) with the Australian and WA state governments. The SEA was relating to a long term mining project in Pilbara. BHP is expecting to operate several mines throughout the region — the documents of which are expected to be released today.

Edgar Basto, asset president of BHP Billiton WA Iron ore commented in a statement on Saturday:

The SEA provides greater visibility of our potential environmental footprint over the next 50 to 100 years, improving our ability, as well as the government and others in the industry, to plan for future operations.

We expect to continue to mine in the region for more than 100 years, which enables us to give back to the communities that have supported us for so long.

Will the rally continue?

The World Bank released their outlook for commodities at the start of this year. In their report, the World Bank reduced their iron ore forecast to US$39. This was coming off the US$52 which was the World Bank’s forecast for iron ore last year.

But while most are predicting iron ore prices to recede, Australian miners continue to expand production. Why is it mostly Australian miners? Because their cost of production is lower.

Global Iron Ore Production Costs

Source: AME Group/Reserve Bank of Australia

Right now, iron ore could become extremely volatile, depending on overseas demand. But, for the years to come, iron ore prices might be at a long we might never see again. Demand for iron ore in countries like China and India is only expected to increase.

But the increase is expected grow slowly. The graph below shows the forecasts of steel stocks for various countries, with an emphasis on China and India.

Past and forecast steel stocks

Source: WorldSteel Association

A lot of information is suggesting iron ore prices will pick up in the future. There’s no question that it will play an important role in the world economy going forward. And, if developing nations continue on the track of expanding infrastructure, Australia could be again bolstered on the back of its minerals-rich identity.

Härje Ronngard,

Junior Analyst, Money Morning

PS: With commodity prices declining — and staying down — miners have been adversely affected. Australian miners are not only suffering when it comes to earnings. But investors are aggressively selling them down without thinking of the big picture. This presents an opportunity for the savvy investor.

Money Morning’s resource specialist, Jason Stevenson, believes there are 10 cheap mining stocks for 2016. Only few are predicting commodities to recover. Even the World Bank has reduced their forecasts for various commodities in 2016.

But this might be a good thing. It could mean investors will be able to buy up Australian mining stocks on the cheap. In Jason’s report, ‘The Top 10 Australian Mining Stocks for 2016’, he’ll reveal why now could be the best time to buy mining stocks. You’ll also find out the disturbing trigger which will catapult these 10 mining stocks up.

To get your free copy of Jason’s report, click here.


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