Iron Ore-Spot at 3-month top on brisk Chinese buying

Thu Aug 25, 2011

* High China steel output on brisk construction demand
* Chinese buying could wane if ore prices rise further
* Shanghai rebar slips to two-week low
By Manolo Serapio Jr

SINGAPORE, Aug 25 (Reuters) - Spot iron ore prices rose to their highest in more than three months and offers stayed firm on Thursday as Chinese mills restocked amid brisk steel demand.

Strong construction demand has been behind the rapid pace in China's daily steel production, which has averaged more than 1.9 million tonnes since late February, up from last year's 1.7 million tonnes.

But analysts and traders said the upturn in iron ore prices could lose steam if steel prices in China, the world's biggest consumer and producer, fall sharply.

"It looks like Chinese restocking is still underway, they still seem happy to buy iron ore. But they're probably at a point where they could pull out any minute," said Greme Train, commodity analyst at Macquarie in Shanghai.

"So if there's any negative news flow in the next couple of weeks, like weak PMI or another rate hike, then you could see a pullback in buying."

Two index-based spot prices hit their highest levels since mid-May, with 62-percent iron ore rising 0.3 percent to $180.25 a tonne on Wednesday, according to the Platts index IODBZ00-PLT. A similar grade at The Steel Index .IO62-CNI=SI rose 0.2 percent to $178.30.

Metal Bulletin's iron ore index .IO62-CNO=MB gained 0.3 percent to $178.31 a tonne, the highest since Aug. 4.

Offers for Indian 63.5/63 grade ore held at $187-$189 a tonne, cost and freight, on Thursday, said Chinese consultancy Umetal. Australian 62 percent Newman fines were quoted at $182-$184, it said.

Chinese buying appetite could wane if prices continue to rise, traders said.

"This bull run can't continue for too long. I see a price drop in September for sure," said a Shanghai-based iron ore trader.

A drop in Chinese steel futures to two-week lows on Thursday could prompt some mills to step back from buying the steelmaking ingredient.

The most-active January rebar contract on the Shanghai Futures Exchange fell as low as 4,788 yuan a tonne, before cutting losses to 4,806 yuan by 0317 GMT, down 0.3 percent.

But Macquarie's Train expects iron ore buying to intensify towards and into the fourth quarter when supply of domestic concentrates thins out as mining activity slows in winter.

"Risk reward is balanced at the moment in terms of where pricing can go from here, short-term, but at some point before the end of the year I think iron ore will probably be trading $10 higher than it is now."

(sourced Reuters)