Iron Ore Surges to 10-Month High as China May Step Up Smog Fight

(Bloomberg) -- Iron ore rallied to a 10-month high on the possibility that steel supply curbs in China could go on beyond the winter, which would buttress demand for higher-grade material and may put top-quality ore on course to hit $100 a metric ton.

The spot price for benchmark 62 percent content ore advanced 1.1 percent to $79.65 a ton on Monday, the highest since April 6, according to Mysteel.com. The increase was preceded by a gain in futures, with the SGX AsiaClear contract up as much as 1.5 percent to $79.15, also an April-high. Higher-quality Brazilian spot ore with 65 percent iron content delivered to China was steady at $95.25 after rising in the three prior sessions, Mysteel data show.

Iron ore investors have been tracking China’s bid to fight pollution by cutting mills’ output this winter, a drive that’s buoyed prices of higher-quality ores that are more efficient and aided miners including Rio Tinto Group and Vale SA. While those curbs lapse from mid-March, the spur to the latest leg up came on Friday after officials in Tangshan city, a key steel hub, were said to be looking to impose more restrictions through to November. That means mills in the world’s biggest supplier may be making less steel just as demand picks up.

Vale shares rose 2.2 percent in Sao Paulo at 10:40 a.m.

The potential order in Tangshan “could signal further restrictions to northern China’s industrial production outside of the heating season,” Commonwealth Bank of Australia analyst Vivek Dhar said, adding that steel prices will be supported. “The lower utilization rates will likely see Chinese mills continue to target productivity, maintaining a preference for high-grade ore.”

Fresh Cuts

Tangshan’s new round of cuts would run from March 16 to Nov. 14 and would idle steel capacity of 9.875 million tons. While the curbs lower output of the alloy, hurting overall demand for iron ore, they raise steel prices and boost mills’ margins, enabling them to afford more costly inputs including iron ore.

There was a mixed message from Citigroup Inc., which said that while prices may continue rising to $80 in the near term, losses may follow. Under its base case, prices will drop to the $60s in the second, third and fourth quarters. And should a bleaker scenario play out, the slump may be worse.

“Iron ore could even become the best short for the second quarter if major liquidity tightening measures kick in, or if end-user steel demand is proved to be substantially weaker than expected,” the bank said in a note. “Neither of these scenarios is included in our base case, in which we anticipate gradual decline.”

On China’s iron and steel markets:

• Iron ore for May delivery rose as much as 1.5 percent to 556.5 yuan a ton on the Dalian Commodity Exchange, before ending 0.1 percent higher.
• Reinforcement bar for May advanced 2 percent to 4,028 yuan a ton on the Shanghai Futures Exchange, the highest close since Dec. 4.
• Hot-rolled coil for May rose 2.7 percent to 4,080 yuan a ton in Shanghai, the highest since October.

--With assistance from R.T. Watson

To contact the reporter on this story: Jasmine Ng in Singapore at jng299@bloomberg.net.

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, Jake Lloyd-Smith

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