Record steel output, tight supply boost iron ore prices

High global crude steel output and fall in iron ore shipments in June have supported ore prices at a time which is traditionally known as a lull season. In fact, ore prices have gone up by 3.5 per cent in past two weeks.

This key raw material is currently trading at $143-145 a tonne at various ports in India, up from $138-140 a tonne quoted 15 days ago.

“Global crude steel production surged to a record high in June and the key driver was China. The rise in China steel output despite interest rate increase there indicates higher steel demand. It is this demand which has supported the iron ore prices globally,” said Sandeep Jain, commodity analyst with Karvy Comtrade.

According to the World Steel Association (WSA), crude steel production by 64 countries rose to 128 million tonnes (mt) in June. It was eight per cent higher than June 2010. In the same month, China produced 59.9 mt crude steel, an increase of 11.9 per cent over the corresponding month last year.

“All major steel-producing regions showed increased production,” WSA said in its monthly report. Along with swelling steel production, limited ore exports provided strong support to iron prices, which usually fall in June-September.

“The recent price spike was because of supply shortfall from major exporting nations. Bad weather and restriction in mining in some Indian states also contributed to the rate rise,” said an official with a Kolkata-based shipping company.

Due to higher export taxes since April and restriction in mineral exploration in states like Karnataka and Orissa, June iron ore exports slipped to 4.5 mt , against 5.1 mt shipped in the same month last year. The Supreme Court on Friday suspended iron ore mining in 10,868 hectares in Bellary district of Karnataka over allegations of illegal mining and environment damage. This may also have an impact on the ore availability.

Trade body Federation of Indian Mineral Industries (Fimi) has already forecast lower exports in 2011-12. It said, due to lower production, iron ore supply from world’s third largest exporter may come down to 75 mt in the current financial year, against 95 mt exported in the last financial year.

Similarly, the world’s biggest exporter, Australia, has slashed its iron ore export target by 0.6 per cent to 437 mt for 2011-12 citing lower production caused by floods and rain. Meanwhile, ore exports by Brazil, the second-biggest exporter, has showed continuous decline for the past two months. After shedding 7.5 per cent in May from April, the ore exports further softened by 3.5 per cent in June.

A relatively weak dollar on the backdrop of a debt-trapped US economy also kept sending green signals to commodity prices and supported the mineral rates. But, despite these supporting factors, iron ore rates will not rise sharply due to the traditional lull season, as buyers are still reluctant to purchase the commodity at higher rates, said experts.

“Ore prices will move in a tight range till at least September. It may be revised upward later on good demand,” Jain said.

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