Iron ore set to average $100 a tonne for the first time since 2013

Iron ore, the steelmaking ingredient that is the biggest generator of profits for leading miners, is on course to average $100 a tonne over the year for the first time since 2013.

The resilience of the material has helped the mining industry sidestep the worst damage from the coronavirus pandemic, which has hammered other sectors such as oil and gas by cutting away demand for energy.

Iron ore is the best-performing major commodity of 2020, up almost up 38 per cent, according to data from S&P Global Platts. In contrast, gold, which benefited from investors looking for safe places to park cash during the crisis, is about 24 per cent higher, after losing some ground in recent months.

“The spectacular and relentless rise in price of iron ore this year, almost totally driven by China’s seemingly insatiable appetite for commodities, has been a blessing for big producers that saw demand in the rest of the world fall off a cliff,” said Andrew Glass, chief executive of Avatar Commodities and former head of ferrous trading at miner Anglo American. 

The run-up in prices has generated huge profits for Anglo, BHP and Vale as well as other big producers including Rio Tinto and Fortescue Metals Group, which can dig the material out of the ground for less than $15 a tonne. 

Two major factors have propelled iron ore higher this year: booming demand for iron ore in China — where about 80 per cent of the world’s seaborne supply is consumed — and supply disruptions in Brazil, one of the countries most affected by Covid-19.

There had been fears that prices would start to crack in the fourth quarter, but they have continued to advance and on Friday were within a whisker of a new high for the year at $129.50 a tonne, according to a price assessment from S&P Global Platts.

Erik Hedborg, lead iron ore analyst at consultancy CRU, said iron ore was benefiting from a more optimistic outlook for the global economy after two successful trials for Covid-19 vaccines, a stronger renminbi — which fuels Chinese demand — and recent data that unscored China’s remarkable recovery from the pandemic.

“Production exceeded demand at the start of the year when China had its Covid-19 lockdown and inventories were built up, but now we’re seeing that reverse and we see inventory levels dropping,” said Mr Hedborg.

Official data released earlier this week showed China’s industrial production increased 6.9 per cent year on year in October, while investment in infrastructure rose 7.5 per cent. As a result of the extra demand, profits from the production of steel reinforcement bars, a product widely used in the construction industry, hit almost Rmb400 ($61) a tonne this week, from Rmb94 a month go, according to Metals Market Index.

“Mills are increasing output,” said Colin Hamilton, analyst at BMO.

Looking ahead to 2021, most analysts expect iron ore prices to soften. But those forecasts could be upended if Australia’s exports drop because of a bad cyclone season in the first quarter of the year or if Vale, the world’s biggest producer of iron ore, fails to meet its production guidance.

The Brazilian miner, which was rocked by deadly dam disaster in 2019, is set to mine about 310m tonnes of iron ore this year. Mr Hedborg expects Vale to add 40m tonnes of additional output in 2021 but says this is dependent on mines restarting and those that have recently resumed production hitting full capacity.

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