Chinese iron ore market moves up further

Influenced by higher international iron ore prices and recent finished steel price rises, the Chinese iron ore market has registered an increase in the past week. However, as domestic steel mills have limited their purchase volumes, and also taking into account increasing iron ore imports and inventories as well as the reduced momentum for steel prices increases, the uptrend of Chinese iron ore prices is expected to coming under increasing pressure in the coming period.

During the past week, the international freight market was characterized by fluctuations. On February 17, the Baltic Dry Index (BDI) was at 1,292 points, up 200 points on the previous week. On February 17, the freight rate on the Tubarao, Brazil-Beilun/Baoshan shipping route was $18.48/mt, up 1.52 points week on week, while on the same day the freight rate on the Western Australia-Beilun/Baoshan route was $6.73/mt, up $0.24/mt week on week.

During the past week Chinese domestic iron ore prices continued to increase. In the Tangshan district, the transaction prices of 66 percent damp base iron ore have been at RMB 1,160/mt ($177/mt, damp base,VAT excluded) in the past week while in the northeastern region market prices of iron ore are at RMB 1040/mt ($158/mt, damp base, VAT excluded), up RMB 50-60/mt($8-9/mt). Indian iron ore offers have risen; as a result, quotations of 63.5 percent Indian iron ore are RMB $180/mt FOB, while Tianjin port transaction prices stand at $196-199/mt CFR. Meanwhile, mainstream quotations of 63.5 percent Indian iron ore at Chinese domestic ports are at RMB 1,390/mt ($212/mt), up RMB 30/mt ($5/mt) week on week. Australian PB fines stand at RMB 1,380/mt ($211/mt), up RMB 30/mt ($5/mt) week on week, while the market price of 65 percent Brazilian iron ore fines is RMB 1,460/mt ($222/mt), up RMB 30/mt ($5/mt) (US1=RMB 6.57) compared to last week.

After the Spring Festival, both import and domestic iron ore prices at Chinese ports have increased, up by RMB 50/mt ($8/mt) week on week on average. Although the Chinese government has increased interest rates by 0.25 percent, this policy seems to have little effect. The recent rise in steel prices has made traders optimistic about the future. It is reported that the spot market transaction price of 63.5 percent Indian iron ore fines stands near $200/mt CFR, almost as high as in March 2008. BHP Billiton recently published its Q2 iron ore contract prices for China, adjusting its price from $155/mt in January up to $168/mt (FOB). As the average transportation fee from Australia to China is $7/mt, BHP Billiton's iron ore price for China on CIF basis will be $175/mt.

There are some risks facing the Chinese iron ore market. China's iron ore import volume in January this year constituted an all-time monthly record. In January, China imported 68.97 million mt of iron ore, up 47.9 percent year on year or increasing by 10.89 million mt month on month. The average iron ore import price in January was $151.4/mt, up 66 percent year on year. With imports increasing, iron ore inventory levels in China have also risen. Also, as of Thursday this week, some softening has been observed in, Chinese domestic finished steel prices. If the uptrend in domestic iron ore prices is no longer supported by rising finished steel prices, China's iron ore market may start to indicate a downward movement.