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Monday, 12 December 2016

Iron ore price soars to 26-month high

Iron ore rips & ships

It's shaping up to be a positive quarter in the Pilbara, with iron ore exports from Port Hedland up by 10 per cent from November 2015 at 41.15Mt. 

In annual terms, Port Hedland iron ore export cargo shipped rose to another all-time high at 472.5Mt. 

Daily iron price commentary is the domain of The Scutt at Business Insider rather than yours truly.

But it's worth noting here that the spot price roared to a 26-month high of US$83.58/dry tonne today, for a year-on-year increase of +118 per cent.

Massive hat tip to anyone who predicted that bonanza!

Price action this week has been fuelled by speculation over supply cuts and furnace closures relating to substandard steel in Tangshan, while gains in futures prices helped things along a bit (MB IOI). 

In Aussie dollar terms the price sits at A$111.50/dry tonne today, so this is a huge windfall heading Australia's way, along with booming coal prices. 

Drivers of steel demand

Over the short-to-medium term it seems likely that iron ore supply is exceeding demand and that spot prices will eventually fall back.

Across the past three decades well over an additional half a billion Chinese have now become urban dwellers, an unprecedented migration in the history of the world.

At the beginning of the 1980s only 20 per cent of China’s population lived in an urban area, but following the decentralisation of local governments in 1980, today this figure has surged to around 57 per cent. 

It's a numerically breathtaking transformation!

China's urban population is projected to continue rising to 1 billion, so in aggregate demand for steel for housing, automobile production, and machinery should continue to rise until the mid 2020s.

Over the next two decades the demand for steel is projected to rise by around 40 per cent, but the growth engine is no longer likely to be China from the middle of the next decade.

India is expected to pick up the pace in China's stead, with India's demand for steel expected to triple by 2035.

A question mark, however, is whether all of India's demand can be met by domestic production.

As you can see from the first chart, about 85 per cent of Port Hedland iron ore cargo is bound for China, Taiwan, and Hong Kong. 

Not India!