The cash price of iron ore delivered to China, the world’s biggest buyer, rose to the highest in more than a year amid what Goldman Sachs JBWere Pty said was “panic buying” by steel mills.

The cost of 62 percent iron-content ore delivered to Tianjin port
increased 2.9 percent to $124.80 a metric ton yesterday, according to
The Steel Index. The so-called spot price has surged 24 percent in four
weeks and has more than doubled from its 2009 low on March 27.

Chinese mills have stepped up iron ore purchases to meet rising steel
demand fueled by the nation’s stimulus spending. The gains boost
expectations for a rise in annual contract prices, which would raise
profits for Vale SA, Rio Tinto Group and BHP Billiton Ltd., the three
biggest exporters.

“Spot price strength has been exacerbated by panic buying by Chinese
mills increasingly concerned about availability at a time of reduced
spot cargoes on offer from Australia due to contractual commitments,”
Goldman Sachs JBWere analysts Malcolm Southwood and Paul Gray said in a
report dated yesterday.

Rio Tinto, the second-largest iron ore supplier, rose 0.5 percent to
A$79 at the 4:10 p.m. Sydney time close on the Australian stock
exchange. Atlas Iron Ltd. rose 4.7 percent.

Demand has been spurred by buying ahead of the Lunar New Year holiday
in China at the same time as non-Chinese customers boost contract
purchases, Goldman’s Southwood and Gray said. The Chinese holiday
starts Feb. 14 and will last for a week.

Annual Talks

“The sharp gain in prices is largely justifiable by stocking demand
from Chinese traders ahead of the Chinese New Year,” Li Wei, an analyst
at Shanghai-based commodities researcher CBI China Co. said. “Yet it
also has speculative elements as we’re ahead of the annual talks.”

Iron-ore suppliers hold annual talks with steelmakers to fix benchmark
contract prices for the 12 months from April 1, the start of the
Japanese financial year. The four-decade-old pricing system was
fractured last year after Chinese mills failed to reach agreement with
the three largest suppliers, boosting demand for cargoes settled on the
cash market.

“The spot market is definitely a key factor for consideration when they
negotiate the benchmark price revision,” Perth-based Atlas Chief
Executive Officer David Flanagan said today by phone. Contract prices
may rise 10 percent to 30 percent, with “more weighting toward the
upper end. We still see that as a good outcome,” said Flanagan.

Price Forecasts

JPMorgan Cazenove raised its contract price forecast to a 40 percent
gain, from an earlier prediction of a 20 percent increase, on increases
in the cash price, according to a report yesterday from analysts led by
London-based David Butler. The cash price is about 62 percent above
last year’s contract price, according to the report.

China’s 72 major steelmakers will probably post a 41 percent decline in
their aggregate profit for 2009, the China Iron and Steel Association
said Dec. 23. Steelmakers globally will suffer more losses should ore
prices gain in 2010, Baoshan Iron & Steel Co., China’s largest
steelmaker, said last month.

Producers last year agreed to a 33 percent cut in contract prices as the worst global recession since World War II cut demand.

Goldman has raised its forecast for the average 2010 cash iron ore
price, which includes freight costs, by 20 percent to $111 a ton,
according to yesterday’s report. Its forecast for a 20 percent gain in
contract price remains unchanged though the “risk remains firmly on the
upside,” the analysts said.

India, the world’s third-biggest exporter, last month introduced a levy
on shipments to secure supplies for its consumption, boosting prices.
Australia is the world’s biggest exporter of iron ore.

Source: Bloomberg

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