Unexpected surge in the global iron ore price

China , Commodities , Iron ore Jan 21, 2013 No Comments

Iron oreAt $80 in September 2012, the iron ore price was at its lowest for the past 3 years. In 3 months, it surged to a current price around $150 a tonne, a 80% increase! But will it last? As it is often the case, China is the reason for the soaring price of the metal required to produce steel.

Chinese steelmakers absorb 60% of the global iron ore and are doing all they can to put their hands on any available cargo. It is true that at this time of year, China needs to import more since Chinese iron refining factories are typically idling in winter. China also imports more at the beginning of the year in order not suffer from supply disruptions in case the iron ore mines in Australia and Brazil get flooded as it is the beginning of the rainy season in these two countries. However, the current rush exceeds the usual seasonal increase.

Chinese steel manufacturers, who had suffered huge financial losses in the last 6 months, had stopped their iron ore purchases, so now they’re in a hurry to restock. With good numbers shown by the Chinese manufacturing activity in December, the fear to see the iron price climb day after day creates a movement of panic buying. This is also due to the fact that with no annual contracts between China and the major mining groups any longer, the spot price purchases create a huge volatility.

This winter, the winners were the mining companies, which saw their shares soar. Fortescue, from Australia, third largest exporter of iron ore, said it was ready to greatly expand its mining capacity in 2013. In contrast, rival Rio Tinto, the number 2 iron ore giant, behind Brazil’s Vale, is much more cautious and believe that the Chinese New Year marks the end of this sudden upturn in the iron price.

Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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