Will iron ore become the next?

Since 2011, the commodity market has remained at a high level of volatility. After nearly a year’s rise, “the international prices of copper, coking coal and gold are now exceeding the historical highs in 2008.” Bai Zhongyi, head of Asia-Pacific Mining Research at UBS, said in Shanghai recently. This has caused concern among industrialists: Will iron ore become the next?

Costs pushing up iron ore prices Overall, the commodity market has not yet returned to its peak before the financial crisis. Last weekend, the CRB index tracking the movement of major commodity prices reported 333 points, still 30% more than the 473-point historical high created in July 2008.

In this case, some of the products come to the fore with their own reasons: For example, gold's hedging function is greatly highlighted in the context of excess global liquidity. In addition to steady growth in demand, copper is becoming a strategic investment category. The spot copper ETF** that emerged at the end of 2010 is proof. Coking coal has benefited from the tight supply of resources. The flood in Queensland Australia in early 2011 further exacerbated this trend.

There are also many promoters behind the rise in iron ore prices: such as the well-known monopoly in the market, the impact of floods on the production and export of iron ore in Brazil since the beginning of the year. In addition, countries such as India and Iran are still considering increasing tariffs on iron ore exports. “More and more policy factors such as market supervision and environmental protection are affecting the price of iron ore,” said He Peide, global raw materials strategist at UBS.

Stimulated by the above factors, iron ore prices continued to rise on the basis of last year's high level. On the 25th, the quoted price for iron ore on the domestic spot market has exceeded US$190/ton, which is not far from the historical record of 205 US dollars in 2008. "If you consider that the shipping cost in 2008 is much higher than it is now, the current FOB price of iron ore is basically the same as the historical peak, and the mine can be said to be a big earner," an industry source pointed out.

Iron ore prices are high and low?

Such high iron ore prices are also daunting for domestic steel mills. The monitoring of the well-known steel spot trading platform by the Nishijin Shinkansen indicated that as the Spring Festival approached, domestic steel consumption had already fallen to the “freezing point,” and raw material purchases had basically come to an end.

In addition, industry sources have revealed to reporters that at present, some large steel mills have enough iron ore stockpiles for about two months, and the inventory of small and medium-sized steel mills can also reach the end of February. Taken together, the current rise in iron ore can only be "having no market price."

Although the iron ore market has entered a strong wait-and-see atmosphere, due to concerns about the continued rise in post-holiday ore prices, domestic steel prices continue to rise. On the 25th, the steel price of the Nisshin Shinkansen reached 4,790 yuan/ton, which was 160 yuan/ton higher than that at the beginning of the year.

“Because ore prices continue to push up costs, domestic steel prices present a 'passive rise.' But ultimately the steel prices are determined by downstream demand. Market participants should pay attention to the risks involved.” Beijing Steel Union Xu Xiangchun, Director of Information reminded. After all, no one can forget that in 2008, when the ore price rose to its peak, the steel prices blew through the sudden drop in demand, leaving the entire industrial chain suffering a terrible scene of heavy losses.