Rio Tinto and Glencore spoke for months about deal that was once taboo
The news of Glencore and Rio’s discussions “has turned up the temperature on an already simmering M&A environment,” RBC Capital Markets analyst says.
Iron ore prices skyrocketed Thursday to above $70 a tonne, hitting their highest level since January 2015.
The spot price for benchmark 62% fines gained 8.78%, or $5.69, to $70.46 a tonne, extending this year’s gain to 61.7%, according to data from the Metal Bulletin.
In percentage terms, the surge was the third largest since spot pricing first began in May 2009.
In percentage terms, the surge is the third largest since spot pricing first began in 2009.
Iron ore’s recent surge is due in part to recent measures taken by the world’s top producers — Vale (NYSE:VALE), BHP Billiton (ASX, NYSE:BHP) and Rio Tinto (ASX, LON:RIO). The “three big” cut their full-year iron ore guidance this week.
Rio Tinto led the pack, announcing that its 2017 shipments would be lower by about 15 million tonnes. The miner’s global output, however, showed double digit year-on-year gains in the first quarter of the year and said it remains on target to produced a record 350 million tonnes this year.
BHP followed suit cutting its production forecast for the financial year ending June 30 by 10 million tonnes to 229 million tonnes. Quarter on quarter production declined by 7% due to bad weather.
Top iron ore producer Vale also said it expected full-year iron ore production to come in at the lower end of guidance.
But the commodity surge is also a result of China’s fresh stimulus measures that aim to boost steel production, which suggests a revival in the country’s property construction sector that has boosted the outlook for steel consumption.
The sector, however, remains cautious as both actors and analysts alike expects a return to lower prices given the scale of oversupply in the industry.
Speaking in Melbourne on Thursday, the new president of BHP Billiton’s Australian operations, Mike Henry, noted there was too much potential for extra supply to come into the market for prices to hold for more than a few months.
4 Comments
Altaf
We can not justify the rise in ore prices from 40s to 70s in just two months by just supply demand equation.
I still fail to understand what happened fundamentally in last two months that dramatically changed the scene, not only for iron ore but every commodity we can think off.
There is neither any massive mine closures due to lower prices, nor China GDP growth rate suddenly revised up to 25% this year, nor India suddenly sucking up commodities, nor any global political changes.
They say Chinese mine production falling. But it is small enough to justify 60% price rise. Even if it is so, what about other commodities?
Steve
In my opinion, you nailed it in the above comment. This industry… actually any industry with influence from Bay St/Wall St swings wildly past reality. Over-correction is the word of the times. Anyone can play it on every level. Bubbles. Over-corrections. I have theories on why this happens that I won’t get into here. At any rate, bubbles and over-corrections thats how things go now. We are still in a huge bubble (DJA >18000).
Paul Renken
what’s changed fundamentally is the people who control the daily spot price quotes in the world of commodities have found something to play volatility on. Those people are the youngsters on the commodity trading desks and the something is a bit of news on Fe ore. And volatility is where the quick money is made in commodities, not fundamentals.
Altaf
@ Paul, your suggestion looks the only logical explanation. Still I refuse to believe that suddenly all the grey haired, stiff upper lipped trading desk guys and their middle class investors died in a span of 3 months and all of a sudden, just out of college wild eyed kids took over the trading desks supported by young billionaire investors who give a damn for risk reward ratios.
Another explanation may be the downturn was played too far compared to reality and the recovery is only a correction in the making.