LOWER availability of seaborne iron ore due to the Indian monsoon and tight domestic supply in China are likely to push up spot iron ore prices, according to a Macquarie Bank report.
"In our opinion, the spot market for iron ore looks ever tighter in the coming months, and prices are likely to hold at this level with potential further upside," it said.
According to data from iron ore swaps broker Freight Investor Services, the spot price for 62 per cent iron ore fines (particles) fell $US1.42 to $US180.51 a tonne on Monday, including freight and insurance. Prices are up 54 per cent since the start of 2010.
Macquarie said that as global industrial production returned to pre-crisis levels, apparent steel demand was now higher than in the equivalent period in 2008. China's first-quarter crude steel production was up 22 per cent on a year ago and the rest of the world's steel output grew 34 per cent over the same period."Being the marginal buyer of iron ore in the market, China has thus been squeezed by the return of traditional contract iron ore customers," Macquarie said.
Seaborne supply to the spot market was likely to fall further in the short term due to the onset of the monsoon season in India. The bank said history suggested Indian exports might fall by around 60 million tonnes over the northern summer, roughly 6 per cent of the annual seaborne market.
"This will have a direct impact on both the volume of Chinese imports and the availability of spot material to the market, holding the market in short-term deficit," the bank said.
The cost structure of China's domestic production was encouraging expansion of supply, but there was unlikely to be sufficient extra capacity in the short term to cover the Indian shortfall, it said.
Chinese media have confirmed that some Chinese steelmakers have agreed to quarterly iron ore prices with major producers such as BHP Billiton and Vale, despite official denials.The China Economic Times cited an unnamed Hebei Iron and Steel executive as saying several of its subsidiaries had had no choice but to accept the quarterly pricing proposal as their ore reserves would only last until mid-May.The Shanghai Securities Journal said the prices were based on Vale's agreement with Japanese and Korean mills last month -- a 96.4 per cent rise on last year's benchmark to about $US110 a tonne.
However, state-run Xinhua News Agency said no steelmaker had accepted quarterly pricing.