Things are on the up for the voracious Chinese steel industry, but don’t tell all those highly paid investment analysts here and offshore who are gloomy about China, iron ore prices, coal prices and the state of China’s economy — you might force them to think and ignore the herd.

World spot iron ore prices rose above $US150 a tonne for the first time in six months yesterday (up from $US147.60 just before Easter) as sentiment and demand strengthens in China’s large steel sector.  Iron ore prices fell to a low of $US116.75 in October, a move that many analysts in this country seem to still think is where world prices are located. Prices have risen by a quarter since then.

In fact demand is a bit stronger than BHP Billiton’s retiring iron ore boss Ian Ashby suggested in February at a conference in Perth. He said then that the growth in Chinese demand was “flattening”. That warning sparked a turn in sentiment against BHP, Rio and other Australian resource stocks (and those listed in London and the US).

In fact prices are up 8.8% since the start of 2012 and have risen as world oil, aluminium, US gas, copper, gold and other commodity prices have fallen. Yesterday one of the benchmark ores, Australian 62% Fe (delivered to northern China) traded at $US151.25 a tonne according to the Platts pricing agency.

And why the improvement? Well the Chinese economy hasn’t crashed in a hard landing, steel production hasn’t slumped, as the excitable and too listened to (by Western journalists) Chinese Steel Industry Association was claiming in February. On top of this too many analysts ignored the usual seasonal impact of the timing of the Lunar New Year/spring festival in China and failed to take account of the impact over four months of this week long shut down for China. The festival fell in January this year, which meant Chinese steel mills and other commodity buyers boosted orders from November into December to stockpile, then lifted imports in February into March to rebuild stocks for the approaching spring and summer peak demand period. Last year the festival fell in February, meaning the impact on demand and supply was from January through March.

Figures out late Tuesday formed the continuing strength of demand for iron ore. While China’s iron ore imports fell 3.2% from February, they were still more than 5% higher than March of last year when there was restocking after the Lunar festival the month before. Imports amounted to 62.87 million tonnes last month, compared with 64.98 million tonnes in February and 59.48 million tonnes in March last year.

China’s total iron ore imports for the March quarter were up 6% at 190 million tonnes, but that was cut by a 20% plus drop in Brazilian imports, a small fall in shipments from Australia in January and a slump in imports from India. Those declines were driven by wet weather in Brazil (for a second March quarter) and by cyclones in WA (for the second year as well). As well shipments from India have fallen for a third year, something that is helping support the global price at levels much higher than many analysts had figured. In fact Indian exports fell 60% in February from the same month in 2011.

China’s steel exports in March totalled 5.03 million tonnes and were up 16% in the quarter to more than 12 million tonnes. Chinese crude steel production is currently running at an annual rate of more than 700 million tonnes a year (actual production was about 683 million in 2011). Car sales are still rising (up 3% in March). Stocks of steel products have fallen to around a month, down 20% in the past few weeks as steel mills curbed production in the belief demand would be weak.

All this has seen forecasts for a price rise to about $US160 a tonne for ore in the next month. If that happens, it will produce a surprise rise in quarterly ore prices for the September quarter for BHP, Rio and Vale, the huge Brazilian miner.

So if the outlook for iron ore is brightening (at least for next few months) for BHP, why did its share price hit a three-month low in Australia yesterday? Well look at the US shale gas sector where BHP has invested upwards of $US20 billion building a major presence. US gas futures prices yesterday fell below $US2 a million BTU (the standard pricing method for gas) for the first time in a decade.

Investors should be more worried about that investment and the returns BHP won’t get at these prices, than China and the price of iron ore and coal. BHP says it has recognised that fall in has prices by boosting production of liquids from its US shale holdings (that’s a form of oil). But even that ploy is under pressure as shale gas and liquids fields in the US Midwest flood the market with oil. The US state of North Dakota is now producing more oil than the OPEC member Ecuador does: more than half a million barrels a day.

US oil is trading about $US101 a barrel at the moment, Brent crude in London is about $US120 a barrel. The oversupply of crude in the US mid-west has depressed prices. BHP will struggle more in the US than in the Chinese iron ore market.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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