An unexpected jump in Chinese steel production that has bolstered iron ore prices is unlikely to last and miners also are likely to be hit by rising costs as the Australian dollar strengthens and oil prices jump.
Steel production in China rose 3 per cent in March, the first increase since January last year, National Bureau of Statistics figures released on Friday show.
Analysts said daily production of crude steel in March was close to record highs.
While Chinese gross domestic product numbers on Friday suggested the Chinese government had managed to stimulate steel demand by engineering pick-ups in manufacturing, housing sales and construction, data suggested the bulk of the production went towards exports rather than domestic demand.
China's steel exports surged 30 per cent year-on-year and 23 per cent month-on-month.
The rise in steel production has helped drive an iron ore price surge of about 55 per cent since the six-year lows of $US38.30 a tonne on December 11 last year. The iron ore spot price is hovering at $US60 a tonne.
The jump set a fire under the share prices of the big iron ore miners. BHP Billiton shares surged 19.2 per cent last week to close at $19.28 on Friday, while Rio added 11.4 per cent to close the week at $48.20.
Fortescue Metals Group shares jumped 14.2 per cent, even allowing for a 4.7 per cent fall on Friday. The stock closed at $3.04 on Friday.
However, there are concerns the steel production boom – and China's improved economic outlook – may not last.
Liberum Capital said last week that demand in China might have been "front-end loaded and will taper off".
Rio Tinto chief executive Sam Walsh warned at the company's annual general meeting in London on Thursday night that the recent rally was unstainable.
Rio and BHP are set to report March quarter production numbers this week.
"I've said all along that we expect the iron ore prices will be volatile," Mr Walsh said. "That's what we're seeing."
Analysts agreed.
McKinsey & Co said last week iron ore would trade between $US45 and $US50 a tonne this year.
Goldman Sachs was even more bearish, forecasting iron ore to end the year about $US35 a tonne.
Citi forecast an average price of $US38 for 2016 and $US35 for 2017 and 2018.
Source: smh.com.au