Iron ore prices rise to highest level in five months as Chinese steel makers re-stock

Iron ore prices have leaped to their highest level in five months.

The data provider Steel Index says the rise is on the back of heavy steel re-stocking in China, fuelled by an improvement in its property sector.

Prices reached US $141.80 a tonne.

Philip Kirchlechner says there are a complex array of factors driving the price rise which did not happen overnight.

"Steel mills in China are a huge factor in iron ore demand, stocks have been fairly low, about 20 days worth of supply, whereas typically steel mills are 30 to 40 days, so they have been running low.

"Often steel makers run them down to try and avoid purchasing iron ore in the hope prices are coming down, they haven't and therefore they're getting caught short, and that causes buying to increase again and the price to spike."

He says this time the steel mills appear to have got their calculations wrong.

"It's a question of having enough buffer and that's not always easy to plan because as iron ore prices are much more volatile than they used to be, Mr Kirchlechner said."

"Steel makers are trying to watch their costs and they're trying to time purchases in a way that they can minimise costs but, by doing that, they sometimes miscalculate and end up with too less of a buffer."

Patersons Securities' Rob Brierley says other factors have also played a part.

"I think China hasn't stocked up as much as it has in the past, it's running a leaner inventory system, [and] there's been a lot of wet weather in Brazil which has impacted on production from Brazil," he said.

Price spike

This is just one price spike in what's been a buoyant few months for iron ore miners.

And it's flying in the face of predictions the price could fall below US $100 a tonne later this year.

While Mr Brierley admits initial predictions of a dramatic price fall were probably slightly overstated, he's still anticipating the price will moderate towards the end of the year.

"I don't expect it to drop off the cliff so to speak," he said.

"I think there's reasons why it should be a little bit softer this year than say last year but I would expect the price to moderate in the September and October period.

"We are transforming, there are a number of expansions that Rio Tinto and BHP have done and what Vale in Brazil are doing, and that will increase supply.

"So there are a lot of forecasters out there saying there will be a glut of supply coming on next year and the year after."

Mr Brierley says China is moving into a new phase of slower growth but it will still need steel.

"China is transitioning from a construction driven economy to a consumer driven economy so that means steel demand will airball or consumption will slow down but it's still very strong and not expected to peak until 2020," he said.

Iron ore miners are expected to report some of the best annual results this reporting season.

Floor price

Up and coming WA miner, Equatorial Resources, is developing mines in Africa.

The company's John Welborn says he thinks the last few months are evidence the doomsayers were wrong about the iron ore price.

"I think the pessimism over over supply and the view the volatility in iron ore prices is going to lead to much lower prices in the future has been overdone and that's evidenced by the current buoyant prices," he said.

"We have always thought there is a floor that sits under the price at around $110 or $120 a tonne on a long term basis."

Mr Brierley says if the price drops below US $100 a tonne, Chinese iron ore miners are likely to go out of business.

"At the top end of the cost curve, there's a lot of Chinese domestic supply so if the price falls below $100, then the Chinese domestic supply will fall away before the Australian or Brazilian supply," he said.

"So, I see there being a price shield around $100/$110."

Mr Kirchlechner believes there is also a general positive feeling about China but says the move to a spot market pricing system has brought more volatility.

"As we move from a benchmark system to a spot price system for iron ore we have much more volatility and we will continue to see the lows and highs," he said.

"I think generally speaking we'll be above $120 maybe $130 for the rest of the year but we will have our ups and downs."

Chinese authorities have released new data warning steel demand could fall later this year because of its slowing economy and some struggling steel mills could go out of bussiness.