Iron Ore Surges Into Bull Market as Mills Come Off the Sidelines

(Bloomberg) -- Iron ore’s bear market lasted all but three months. The raw material has rallied back into bull-market territory right at the end of the first half on a surge driven by mills in China boosting purchases to replenish inventories, with higher-grade ore in demand.

Ore with 62 percent content delivered to Qingdao rose 3.8 percent to $64.71 a dry metric ton on Thursday, the highest since May 4, according to Metal Bulletin Ltd. Prices have gained more than 20 percent from the year-low of $53.36 hit just two-and-a-half weeks ago, meeting the common bull-market definition. On Friday, the price rose 0.3 percent to $64.95.

“The pickup in physical tenders suggests a real tightness,” Daniel Gradwell, a senior economist at Australia & New Zealand Banking Group Ltd., said in a note. Earlier this week, the bank said trading activity had increased as buyers re-entered the spot market after a prolonged period on the sidelines.

Iron’s advance, which pared a quarterly loss, spurred the commodity’s biggest monthly climb since October in a boost for miners including Rio Tinto Group. While the rally has been accompanied by gains in steel, with mills’ margins seen as robust, the uptick has come even as some banks expect further weakness given rising supply. Goldman Sachs Group Inc. says the price is heading lower and Citigroup Inc. forecasts a slump back to the $40s.

“Steel companies are actively boosting purchases to rebuild ore inventories held at the mills,” said Xu Huimin, an analyst at Huatai Futures Co. in Shanghai, adding that they’d previously refrained from buying as prices sank. “Sentiment about the Chinese economy has taken a turn for the better.”

Iron Ore Surges Into Bull Market as Mills Come Off the Sidelines

The latest gauge of China’s strength came on Friday, with the official manufacturing purchasing managers index at 51.7 in June from 51.2 in May. While the steel industry’s reading eased to 54.1, it remains above the level of 50 that signals expansion. The country accounts for half of global steel supply.

Port Holdings

In China, ore is held both at ports as well as mills. While holdings at the former have expanded to a record above 140 million tons, there’s speculation mills’ own stockpiles are much lower. “Overall, the inventory situation isn’t nearly as bad as it seems,” Jeremy Sussman, managing director for metals and mining at Clarksons Platou Securities Inc., told Bloomberg in an email.

There are indications of rising global supply. The top producers may boost exports 3.2 percent to 301 million tons this quarter, Sanford C. Bernstein & Co. estimated in a note this week, citing vessel-tracking data. BHP Billiton Ltd. and Anglo American Plc have had strong quarters, according to the note.

Goldman highlighted the likelihood of increased production, rising stockpiles and weaker prices, according to a June 29 report that predicts iron ore will average $47 next year. Even if Chinese steel production growth holds at about 4 percent for the rest of this year, that still won’t be enough to balance the iron ore market, analysts including Amber Cai wrote.

The raw material’s jump has lifted miners’ shares this week. In Sydney, Rio climbed 7.6 percent, while BHP added 3.9 percent and Fortescue Metals Group Ltd. was up 12 percent. Futures dropped in Asia, with the contract in Singapore losing as much as 1.8 percent.