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Is iron ore heading back to US$60 a tonne?

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So much for the crash in iron ore prices.

Overnight, the spot iron ore price rose 2.3% to US$58.82 a tonne, and the commodity is now up 11.2% in the past week, and 35% since the start of the year.

According to Metal Bulletin, surging Chinese steel prices were the main driver.

“Ferrous futures in China surged in morning trading after the Tangshan Iron & Steel Association published detailed plans late last Friday for production cuts in Tangshan ahead of the International Horticultural Expo that begins in end April.

The plans specified enforced cuts for emissions-heavy plants to ensure good air quality during the horticultural expo. Mills and coking plants in the country’s steelmaking hub will be required to limit production on 33 selected days that coincide with several key events during the half-year-long expo to cut their emissions by at least 30-50%, depending on their proximity to the event.”

In other words, steelmakers in Tangshan, a major steel producing city, are getting in early before they are forced to cut production. That suggests that the current rally is still temporary, and steel and iron ore prices may fall once the horticultural expo gets underway. The expo starts in late April and continues until October 2016. Crude steel output is expected to halve for at least part of the expo.

It’s the second time spot iron ore prices have jumped, with iron ore prices soaring 18.6% to US$63.74 a tonne earlier this month in one day, as steel mills stocked up on the commodity before the imposed shutdown occurs.

China has major problems with pollution in many of its cities thanks to heavy industrial manufacturing such as steel, so it’s no wonder they want to ensure at least some low pollution or pollution-free days. It’s also not the first time China has shut down part of its steel industry for pollution reasons. In July and August last year, iron ore prices soared ahead of a major military parade in early September, and then crashed to a multi-year low of US$38.30 a tonne in December 2015.

It’s also not the first time China has shut down part of its steel industry for pollution reasons. In July and August last year, iron ore prices soared ahead of a major military parade in early September, and then crashed to a multi-year low of US$38.30 a tonne in December 2015.

Australia’s iron ore producers might want to batten down the hatches for when the storm hits, as it’s likely to any time between  now and early April when iron ore prices will almost certainly start falling.

In the past month, the iron ore price rally has lifted Australia’s smaller miners, with Fortescue Metals Group Limited (ASX: FMG) up 38%, BC Iron Limited (ASX: BCI) up 52%, Atlas Iron Limited (ASX: AGO) up 170% and even Arrium Ltd (ASX: ARI) has seen its share price jump 53%. With higher costs, these miners are more leveraged to changes in the iron ore price.

Mineral Resources Limited (ASX: MIN) and Mount Gibson Iron Limited (ASX: MGX) have seen their share prices rise 20% and 8% respectively while Rio Tinto Limited’s (ASX: RIO) share price is up just 3.5%.

Foolish takeaway

Credit Suisse analysts say they expect iron ore prices to fall in the second half to US$35 a tonne, thanks to weak steel demand and rising steel supply. They aren’t along with a number of commentators forecasting prices of around $40 a tonne on average for 2016.

Look out below.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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