Iron ore hits 11-week high and more gains could be ahead

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The spot iron ore price gained 1.8% to US$63.07 overnight, and there could be more gains ahead.

So much for the bearish view shared by some (including me).

That came after yesterday’s 4.5% gain, the most in three months to hit US$61.96 a tonne.

Dang Man, an analyst at brokerage Maike Futures in Xi’an, China, has told Fairfax media, “Iron ore alone can’t make steel, it needs the help of coking coal. The shortage in coal supply right now seems unlikely to improve before year-end. That’s driving steel prices and production higher, benefitting iron ore too.”

Coking coal has more than doubled this year, hitting levels not seen since December 2013. Steel mills have seen steel prices rise and profit margins expand, and they have passed on the higher input costs to customers. Output has also risen – up 3.9% to 68.2 million in September compared to last year according to China’s statistics bureau. Over the past nine months, production has risen 0.4% despite widespread fears that production would crater and take commodity prices with it.

The last time iron ore hit US$63 a tonne was in May this year. Price has recovered more than 46% since the start of this year too. And the share prices of Australia’s big miners have also recovered with it.

Fortescue Metals Group Limited (ASX: FMG) has seen its share price nearly triple, rising 195% to $5.53 currently, while Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) are up 20% and 29% respectively. BHP has also benefitted from the turnaround in the oil price. All three miners have also seen their share prices rally again in early trading.

According to Reuters, low steel inventories are driving Chinese mills to ramp up output, which has boosted demand for its two main ingredients – iron ore and coking coal.

That could mean seeing even higher iron ore prices than today.

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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

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