Steadier China economy offers iron ore hope, but caution stays

Tue Aug 20, 2013 2:38am EDT
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By Ruby Lian and Manolo Serapio Jr

SHANGHAI/SINGAPORE (Reuters) - A rally in iron ore prices to five-month highs has spurred optimism a stabilizing economy may help top buyer China absorb rising global supply, prompting some analysts and traders to raise their estimates for the second half of the year.

But other forecasters stuck to their price projections, convinced the recent upturn would be short-lived and could quickly falter if Chinese steel demand fizzles out during an anticipated peak season that starts next month.

Still, a rosier outlook suggests that the second-biggest shipped commodity after oil will remain a boon to top miners Vale SA (VALE5.SA: Quote), Rio Tinto (RIO.AX: Quote)(RIO.L: Quote) and BHP Billiton (BHP.AX: Quote)BHP.L, although prices remain well below record highs near $200 a tonne (1.1023 ton) reached in 2011.

Surprisingly upbeat Chinese trade and factory output data last week pointed to a stabilizing economy after more than two years of slower growth, fuelling hopes steel demand, which has been firm at the start of the second half of the year, could strengthen further.

"We see stronger-than-expected iron ore demand in the second half since mills have to replenish supplies after destocking in the first half," said Graeme Train, a commodity analyst with Macquarie in Shanghai. "Stronger steel demand will support ore."

Train sees iron ore at around $125 to $130 a tonne in the second half, up from a previous forecast of $120, with the possibility of even stronger prices in the fourth quarter.

Heavy restocking by Chinese steel mills has boosted spot iron ore prices .IO62-CNI=SI by 29 percent from the year's low at end-May to hit $142.80 a tonne last week, its loftiest since mid-March. The price stood at $139.20 on Monday.

Before the rally, analysts polled by Reuters on July 4 had expected prices to fall to an average $116 a tonne in the second half, from $136.70 in January-June.   Continued...

A steel worker operates a furnace at a steel manufacturing plant in Hefei, Anhui province July 12, 2011. REUTERS/Stringer