Firmer spot steel prices in China, the biggest consumer of both steel and iron ore, are encouraging producers to buy more iron ore amid limited supply of prompt shipments, pushing up prices that have almost doubled since September. Inventories of iron ore at small to medium-sized Chinese steel mills have dropped to about 10-15 days of consumption after the Lunar New Year break from 20-30 days previously, prompting them to restock, said a trader in Rizhao in China's eastern Shandong province.
Traders with iron ore stocks stored at major Chinese ports have increased their prices by 10 yuan to 20 yuan ($1.60-$3.20) per tonne this week, he said.
"I think we're seeing mild restocking because some mills are also hesitating to buy with prices continuing to rise," the trader said, adding he sees prices climbing above $160 but staying below $165 for the rest of February.
Benchmark 62 percent grade iron ore for delivery to China <.IO62-CNI=SI> rose half a percent to $158 a tonne on Tuesday, according to data provider Steel Index.
That is only 50 cents shy of the 2013 high hit on Jan. 8, which was the highest since October 2011.
Prices have rebounded more than 82 percent since hitting a three-year low below $87 in September, pointing to more profit margins for big, low-cost miners such as Vale, Rio Tinto and BHP Billiton .
But BHP said on Wednesday it expects iron ore prices to remain under pressure as new low-cost supplies come into production, even though demand is expected to improve over the next 12 months.
Smaller producer Fortescue Metals Group expects the price of iron ore to settle around $120-$130 this year, with potential for it to be higher if Chinese demand remains strong.
'HIGH AND RISKY'
Rio Tinto's spot sale of a cargo of Australian 61 percent grade Pilbara iron ore fines at a higher than expected price on Monday helped propel the market this week as the Chinese returned from Spring Festival holidays.
Vale sold a cargo of 64.7 percent grade Brazilian Carajas fines at a tender on Tuesday at $168 per tonne, traders said.
A similar 64.48 percent grade Brazilian cargo traded at $161.61 a tonne in late January.
Traders said Vale is offering another 135,000 tonnes of the Carajas fines at a tender closing later on Wednesday.
A Shanghai-based trader said he is considering buying cargoes, but is hoping for prices to retreat first.
"Before the Chinese New Year, most medium-sized traders have all sold out cargoes so they are looking to buy, but some believe the prices are too high and risky," he said.
If steel prices sustain recent gains, that may prod these traders to chase iron ore cargoes, he said.
Demand for steel in China usually picks up after the Lunar New Year as construction activity resumes following the winter freeze.
Spot prices of steel rebar in Shanghai rose by 50-60 yuan to between 3,860 and 3,960 yuan per tonne on Tuesday, according to Chinese consultancy Umetal.
The most actively traded October rebar contract on the Shanghai Futures Exchange was steady at 4,190 yuan by the midday break, after hitting nine-month highs in early February