Iron ore hits record on China demand

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Iron ore, the steelmaking ingredient that is the main source of profits for some of the world’s biggest miners, has hit a record high as Chinese steel mills crank up production to make the most of high margins, while copper also closes in on a new peak.

Iron ore hit $193.85 a tonne on Tuesday, according to a price assessment from S&P Global Platts, surpassing its previous record of $193 set during the 2011 commodity boom. Iron ore has gained 130 per cent in the past year and copper 90 per cent.

“Steel prices are being helped by very strong demand in China and globally as we continue to normalise post-Covid,” said Ben Cleary, a partner at Tribeca Investment Partners, a boutique hedge fund.

Strong demand from China has also fuelled the copper rally, as has demand from investors scouring markets for trades that will outperform accelerating inflation. The world’s most important industrial metal rose 1.2 per cent to $9,884 a tonne and sits just over $300 below the all-time high of $10,190 also set in 2011.

“That the copper market is tight at present is certainly not in debate,” said Colin Hamilton, analyst at BMO Capital Markets.

The iron ore market has drawn support from Beijing’s efforts to clean up its highly polluting steel industry. Production curbs in Tangshan, the country’s top steelmaking city, have restricted capacity and pushed up domestic steel prices.

Steel mills in other parts of the country have rushed to make the most of high returns by boosting production ahead of possible further restrictions or moves by Chinese authorities to scale back pandemic stimulus measures.

“In the 2000s China was increasing global steel production capacity at 10 per cent per annum in some years, now with similar demand tailwinds they are cutting it,” said Cleary.

After being out of favour for most of the past decade, commodities are back in demand as investors seek assets that will benefit as the global economy picks up speed after the pandemic. On the Shanghai Futures Exchange, the number of contracts for copper — used in everything from air-conditioning units to cars and power networks — was also at its highest level in more than a year this week.

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Bets on higher commodities prices are being underpinned by strong physical demand from China, the world’s biggest consumer of raw materials, where the economy continues to run hot.

“Robust Chinese trade data, along with strong domestic macro data, show the resilience of Chinese commodities demand growth,” said Judy Su, an analyst at Citi. “March in particular saw strong month on month and year on year increases in commodity imports.”

Surging iron ore and copper markets are a boon for major mining companies including Anglo American, BHP, Rio Tinto and Glencore, which have generated huge amounts of cash from the run-up in prices since the depths of the Covid-19 crisis.

Analysts believe BHP and Rio can be the top dividend payers in Europe this year.

On Monday, Vale, which vies with Rio for the title of the world’s biggest iron ore producer, said it had generated $5.8bn in free cash in the first three months of the year on the back of rising prices, an increase of almost $1bn over the previous quarter. The company recently announced plans to buy back up to 5.3 per cent of its issued share capital.

In its earnings report, Vale said potential for further production curbs in China could keep steel prices at “very high levels” although it cautioned that global supply was likely to increase in the second half of the year.

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