Iron ore prices have surged to near a 1½-year high after India, the world's third largest exporter, slapped an export tax on the commodity used to produce steel.
The imposition of the 5 per cent export duty over Christmas, combined with strong global demand and low domestic production in China, have pushed iron ore prices up almost 30 per cent in the past month, traders and brokers said.
The cost of the benchmark Australian ore - 62 per cent iron content - rose yesterday to $124.80 a tonne, including freight, according to swaps data from the Singapore Exchange. It is the highest level since September 2008.
"The Indian export tax has contributed to tighten the market," said Michael Gaylard, an iron ore broker at Freight Investors Services in London.
The introduction of the export duty also highlights how iron ore, a commodity that in the past almost never attracted attention as prices were stable and supplies were considered abundant, is slowly becoming a sensitive geopolitical issue.
Jim Lennon, a commodities analyst at Macquarie in London, said India wanted to discourage iron ore exports and protect supplies for its own steel industry with the tax.
Some analysts believe that the steel-intensive urbanisation of emerging countries means that iron ore is now more integral to the global economy than any other commodity, with the exception of crude oil.
China is the world's largest importer of iron ore and Beijing is very sensitive to the cost of the mineral. India supplies about a fifth of Beijing's overseas purchases.
The rally in ore prices comes as miners Vale of Brazil, Rio Tinto and BHP Billiton and global steelmakers start their price negotiations for the 2010-11 contracts.
Excluding freight costs, the price surge puts current spot prices more than 80 per cent above the $61 a tonne at which the 2009-10 annual contracts were settled, suggesting the miners have the upper hand in the talks.
Macquarie is the most bullish forecaster, anticipating that annual contracts will increase by 30 per cent. The Australian bank's Mr Lennon said that domestic ore production in China was not recovering as much as expected, "in part due to the harsh winter but also because of the depletion of the reserves."
On top, he added, miners are diverting supplies to their traditional customers in Japan, South Korea and Europe, reducing supplies to China.
Malcolm Southwood, a Goldman Sachs JBWere mining analyst in Sydney, said that with spot iron ore now trading sharply above annual contract prices, "there must be a growing motivation for [steel] mills to lock in contract prices sooner rather than later".
Source : FT.com