China's iron ore costs rise 10% to a report excessive on provide points
A freight train carrying iron ore travels along a rail towards Port Hedland, Australia on Monday, March 18, 2019.
Ian Waldie | Bloomberg via Getty Images
Iron ore futures on China's Dalian Commodity Exchange rose nearly 10% to an all-time high on Friday, breaking the 1,000 yuan ($ 152.95) per ton mark for the first time in history.
A confluence of dwindling iron ore supplies, rising steel demand and possible short-term disruptions from storms in Western Australia has raised resource analysts' concern.
Lower supply estimates from Vale, the world's second largest iron ore producer, have heightened those fears. The Brazilian company recently cut its production forecasts for 2020 and lowered its forecasts for the next year. Meanwhile, shipments from Brazil to the rest of the world fell to a six-month low in November.
Erik Hedborg, a senior analyst at raw materials firm CRU, told CNBC on Friday that China's strong economic performance and infrastructure incentives had spurred a surge in demand that had already depleted low inventories and tightened market conditions. At the same time, the supply of iron ore power plants in Australia and Brazil at sea has also decreased.
According to the World Steel Association, much of which is exported to China, Australia accounted for 58% of the world's iron ore supply at sea in 2019. Brazil accounted for 23%.
"There is now a tropical storm on the coast from which all iron ore is shipped, and two of Australia's largest ports have now closed and together they account for just over half of the world's iron ore supply," added Hedborg.
A low pressure weather system has already arrived on the coast of Western Australia, and another is under way. Residents are advised to prepare for storm winds and high tides.
Hedborg believed that China's strong demand is likely to continue as persistently low inventory levels are a major concern for Chinese steelmakers, while falling overseas supply will also continue for some time.
Iron ore is a raw material for the production of steel, which itself is used to manufacture high-rise buildings and mass transit systems.
"We're going to see lower production from Brazil than expected, so it will stay that way through 2021, and we're seeing problems getting the mines in Brazil back on line, for example, and Vale will continue to operate at a reduced level in the coming year." ," he said.
While the turbulent Australian weather may be short-term, Hedborg stressed that the first quarter is usually more prone to weather disruption due to events such as tropical cyclones.
"This is a sign that we could have a pretty problematic cyclone season in Australia," he added.
A group of Chinese steelmakers on Friday called on the country's market and securities regulator to investigate the recent surge in iron ore prices, according to Reuters, claiming they were "deviating from supply and demand fundamentals."