As iron prices crest the US$200 per tonne mark, the possibility of any near-term collapse in those prices continues to fade.
Iron ore futures closed overnight at US$213.00/t, while at the Dalian Exchange in China the metal’s contracts rose on Monday by the daily limit — although presumably could have gone even higher had that limit not been in place.
And in Singapore on Monday, futures soared 10% in early trading.
ANZ Bank reported Tuesday that “[Chinese] steel mills are clamouring to secure cargoes of the steel making raw materials”.
Iron ore prices has experienced a rapid increase over the past few months.
The steel mills are worried that Beijing will limit steel production to cut costs of iron ore imports.
Guinea mine is at least five years away
But there is a longer-term picture.
Now it seems the long-feared alternative to Australia as a supplier — the proposed Simandou mine in Guinea and part-owned by Chinese interests — is “at least” five years away from production, and more than a decade away from reaching full output levels, according to the Commonwealth Bank.
Even in its initial stage, Simandou would produce only 4% of the seaborne iron ore market.
This contrasts to the fact that China is dependent on Australia for about 50% of the iron ore it consumes (although latest Chinese published figures put it at 60%).
In a report out Tuesday, CBA’s commodities analyst Vivek Dhar concluded that China’s reliance on Australian iron ore is unlikely to change.
Coal experience may deter iron ore boycott
China may want to block iron ore imports from Australia as it has done with coal, barley, wine and other commodities.
While there is no doubt that diplomatic relations are worsening between the two countries, China’s own goal on coking coal may stay its hand.
Mr Dhar, who is one of the most authoritative Australian analysts on China commodity consumption, pointed out the Chinese are now paying around US$240/t for seaborne coking coal, which is more than double Australia’s premium coking coal price of around US$110/t.
This, as well as the high iron ore price, is feeding into steel making cost blowouts.
The ANZ economics team, in its Tuesday morning note, is concerned that China’s decision to indefinitely suspend the China-Australia Strategic Economic Dialogue has lifted the risk of potential disruptions to supply of iron ore from this country.
However, the CBA takes the view that this scenario is unlikely given China’s steel sector being so heavily dependent on Australia for half its needs.
