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Iron Ore Out of Deep Freeze

The global iron ore market came out of the deep freeze on Thursday after a week-long break in China, with prices advancing on speculation that steelmakers struggling with overcapacity and sinking prices will continue to operate, sustaining demand.

Futures rose 1.9 percent to close at 373.5 yuan ($59) a metric ton on the Dalian Commodity Exchange. Spot ore with 62 percent content delivered to Qingdao climbed 5.3 percent to $55.97 a ton on Thursday, the first increase in four days, according to Metal Bulletin Ltd., as markets and many businesses in China were closed Oct. 1-7.

Iron ore is headed for a third annual drop as BHP Billiton Ltd. and Rio Tinto Group boosted low-cost supply while economic growth faltered in China, hurting demand. Despite some of the worst margins ever and contracting local consumption, steel production has remained relatively stable, with mills focused on preserving cash flow, according to Citigroup Inc., which forecasts steady output through November before a drop-off next year. Port inventories in China climbed 3.8 percent in the three months to September, snapping four quarters of declines.

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“For as long as loss-making steel mills continue their operations, demand for iron ore will hold up,” Huatai Great Wall Futures Co. said in a note. “While port stockpiles have rebounded in September and profits at steel mills continued to fall, we don’t think iron ore will decline very much.”

Steel rebar, used in construction, was 0.4 percent higher at 1,833 yuan a ton on the Shanghai Futures Exchange, still near the lowest since trade started in 2009. Prices lost 29 percent this year, headed for a fifth annual drop.

“It’ll be difficult for mills to cut output,” Dang Man, an analyst at Maike Futures Co. in Xi’an, China, said by phone. “The most important reason is financing. The losses from reducing output might be even bigger than what they lose by continuing production. Banks might be unwilling to lend them money if they cut output, which will make it difficult for them to repay debts.”

China’s steel output climbed 1.7 percent in August from a month earlier, according to the latest figures on industrial production. Over the first eight months, supply was about 2 percent lower. The country makes more than half of the world’s steel.

Data this month showed the purchasing managers’ index for China’s steel industry, which has shown contraction for more than a year, falling to 43.7 in September from 44.7 a month earlier. Readings below 50 indicate shrinkage.

Source: http://www.bloomberg.com/


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