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Why Iron Ore Prices Could Have More Upside after Breaching $100

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Reduced supply of iron ore

Iron ore miners, including Vale (VALE), BHP Billiton (BHP), and Rio Tinto (RIO), have signaled reduced iron ore production, and steel mills aren’t prepared. As reported by S&P Global Platts, citing a Shanghai-based trader, “Steel mills have been keeping iron ore inventories low and only buying hand-to-mouth from Chinese ports to accommodate steel production.”

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Strong iron ore demand

The demand from end consumers has remained strong. China’s steel production in April, for example, came in at a record high of 85.03 million tons. There have also been several rounds of stimulus in China, which is also supporting steel demand. Moreover, a new round of environmental inspections is underway in China’s industrial hubs. Tighter environmental controls push Chinese mills to go for higher-quality imported ore as opposed to domestic ore.

Iron ore prices rise to a five-year high

On May 17, seaborne iron ore prices (XME) hit over $100 per ton, the highest they’ve been since July 2014. Recently, Credit Suisse (CS) upgraded its iron ore price forecast from $95 per ton to $110 per ton in the period between July and September, as the peak buying season in China (FXI) coincides with supply tightness.

The surge in iron ore prices is benefiting all iron ore miners. Cleveland-Cliffs (CLF) stated during its first-quarter results that the Vale dam disaster could mean higher iron ore prices and pellet premiums, as there’s no short- or medium-term solution for these shortages. Since Vale’s dam burst on January 25, its stock has fallen 22.5%, while the stocks of CLF, BHP Billiton, and Rio Tinto have risen 12.8%, 11.6%, and 25.0%, respectively.

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