Spot iron ore prices in China extended gains on Wednesday as tight supplies and firmer steel prices this week encouraged buyers. Offers to sell Indian ore with 63.5 percent iron content stood at $173-175 per tonne on Wednesday, cost and freight delivered to China, up $2 from the beginning of this week, traders said.
But market appetite could wane, with some traders becoming hesitant to make forward bookings as Chinese steel mills were cautious in accepting prices higher than $170 per tonne.
"To some extent, transactions are relatively good this week, and prices have risen to as high as $175 per tonne today," said an iron ore trader in Beijing. "But at these levels, I expect buying of imported iron ore to slow a bit."
"Some steel mills are struggling to produce flat steel products, given high raw material costs and they have been very cautious on prices and have not been buying too much forward shipment," said an official in charge of buying iron ore for a medium-sized steel mill.
Two small steel mills in Tangshan in China's steel production center of Hebei province have booked two shipments at below $170 per tonne, C&F, this week, traders said.
Firmer steel prices this week encouraged iron ore buyers, along with continuing tight supplies out of India, the world's third-largest exporter of the steelmaking ingredient, where bad weather and an export ban in the southern state of Karnataka state have slowed, and limited, shipments to China.
The most active May rebar futures in the Shanghai Futures Exchange rose to a near one-month high of 4,771 yuan per tonne on Tuesday, before easing slightly on Wednesday.
The Steel Index 62 percent iron ore benchmark .IO62-CNI=SI slipped $2.40 to $164.70 a tonne on Tuesday, but not far off the 6-1/2-month high of $167.80 touched last week.
Prices for forward swaps continued to trend higher as investors remained bullish about the outlook for 2011.
The January contract cleared by the Singapore Exchange gained 56 cents to $170.5 per tonne and the February contract jumped $1.12 to 168.62 per tonne.
Iron ore prices are likely to sustain their strength into 2011 as capacity expansion plans of global miners such as BHP Billiton , Rio Tinto and Vale take time to get to the supply chain while demand, particularly from China, continues to grow. "We've actually got surplus demand at the moment and I think that will continue for the next couple of years," said Troy Flannery, senior resource analyst at DJ Carmichael in Perth. "Once you start seeing BHP, Rio, Fortescue and even Vale double and almost treble their output, then you will start talking about a much tighter market and the possibility of prices coming off a bit. But at the moment there's insufficient supply that can't keep up with demand, so for the next couple of years I can't see any cooling in iron ore prices." Heavy rains in parts of Australia, which had disrupted operations in coal-producing northeastern states, were unlikely to affect iron ore production which is concentrated in the western Pilbara region, said Flannery.