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Iron ore hits a two-week high: More gains to come?

The Fortescue Metals Group Limited (ASX: FMG) share price has been one of the biggest movers on the market this morning after the iron ore price hit a two-week high.

At the time of writing the iron ore giant’s shares are up 3.5% to $5.41.

Elsewhere, BC Iron Limited (ASX: BCI), Atlas Iron Limited (ASX: AGO), Sims Metal Management Ltd (ASX: SGM) and Rio Tinto Limited (ASX: RIO) are also up sharply on the news.

Why did iron ore prices jump?

According to Metal Bulletin, the spot price for the benchmark 62% fines increased 1.8% to US$62.69 a tonne on Friday. This puts it at its highest level in over two weeks and around 4% higher than its six-month low of US$60.15.

Prices have rallied strongly since Chinese data revealed that its steel mills produced a record 72.8 million tonnes of steel in April. This was up by almost 800,000 tonnes on the previous month, which had been the previous record.

It would appear as though traders are speculating that demand for the steelmaking ingredient will increase, offsetting the new supply which is expected to hit the market this year and next.

Will iron ore prices continue to rebound?

With Chinese iron ore futures pointing higher, it looks likely that iron ore prices will continue to climb higher overnight.

But how long this can last is the million dollar question. I’m reasonably sceptical that there is sufficient demand to offset the increasing supply and expect prices to remain under pressure for some time to come.

It is for this reason that I’m avoiding the sector at the moment.

However, if you’re bullish on iron ore prices and want exposure to the resources sector, then I do think Fortescue could be a great option at its current share price.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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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