Iron Ore-Spot prices at 2-1/2-month top on brisk China demand

Wed Aug 3, 2011 |By Reuters

* Firm China steel prices, tight spot supplies behind rise
* BHP sells 210,000-tonne iron ore cargo at premium-trade
* Indian 63.5/63-grade ore may break $200/T-trade
By Manolo Serapio Jr

SINGAPORE, Aug 3 (Reuters) - Spot iron ore prices rose to 2-1/2-month highs and offers remained strong on Wednesday, buoyed by firm steel demand in top consumer China and limited cargoes in the physical market.

The price of iron ore with 62-percent iron content rose 50 cents to $179 a tonne on Tuesday, according to the Platts index IODBZ00-PLT.

A similar gauge by The Steel Index .IO62-CNI=SI jumped $1.30 to $177.40 and Metal Bulletin .IO62-CNO=MB gained 96 cents to $176.71.

The price indexes, based on spot deals in China and which global miners use in determining supply contract rates, are at the highest levels since mid-May.

"We believe prices will continue to rise. Chinese mills continue to produce steel at record pace and there's very limited supply of iron ore in the spot market," said a Singapore-based trader.

Supply from India, the world's No. 3 exporter of the steelmaking raw material, had been curbed by the monsoon rains and policy issues.

A political crisis in the southern state of Karnataka, where a quarter of India's annual shipments come from, was expected to further delay a resumption in shipments even after the country's top court ordered the state to lift an export ban in April.

Adding to the supply woes, India's Supreme Court last week banned mining in the iron ore-rich Bellary district in Karnataka.

"We are seeing an increase in shipment pace from Australia and Brazil. However, most of these tonnages are going to long-term contracts so they don't have an impact on the spot market," said the Singapore trader.

Global miner BHP Billiton sold a 210,000-tonne cargo at a tender on Tuesday at prices higher than a previous sale, traders said. Big cargoes, which only large steel mills can take, are usually sold at a discount.

Of the entire cargo, BHP sold 63-grade Newman iron ore fines at $182.75 a tonne, cost and freight, up from $182 on Monday, traders said. The other half comprising 61.2-grade MAC fines was sold at $175.30 per tonne versus Monday's $173.

POSITIVE MARGINS

"It was bought by a Chinese steel mill so it's a confirmation that it's not only traders that are pushing this market up," said another trader in Singapore.

"Because steel prices are strong the mills are able to pay these high iron ore prices and produce steel because their margins are positive."

The most-active January rebar contract on the Shanghai Futures Exchange hit a high of 4,966 yuan per tonne, near the three-month top of 4,968 yuan reached on Monday. It closed nearly flat at 4,942 yuan.

China's drive to build 10 million cheap housing units this year has been largely behind a boom in its construction sector which has buoyed its steel demand.

The world's biggest steel producer, China expects this year's crude steel output to rise to a new record of between 690 million and 700 million tonnes from 627 million tonnes in 2010.

"The market is becoming active in Qingdao and Rizhao ports this week as domestic supply of iron ore concentrate is tightening and steel mills, which are running at low inventories, have started to buy imported material," said an iron ore trader in Shanghai.

Offers for Indian 63.5/63 grade iron ore fines rose to around $190 a tonne on Wednesday from $186 last week and traders expect the price to break $200 a tonne if the momentum is sustained.

"As long as Chinese steel prices remain firm or at least don't collapse, iron ore prices are going to remain strong," the first Singapore trader said.

Underscoring strong Chinese demand, Fortescue Metals Group , Australia's third biggest iron ore miner, said it expects profit margins to improve as it expands operations and ramps up production.

Fortescue Chief Executive Nev Power said margins were currently holding at around $100 per tonne, but were set to rise once the company's Solomon deposit is brought into production, and the miner benefits from economies of scale and more accessible ore.