Iron Ore Soars as Bull Case Gets Big Lift From Industry PMI

(Bloomberg) -- Iron ore rallied after manufacturing data from China showed another expansion in the world's largest steel industry as mills churn out record volumes, helping the raw material cap its first back-to-back monthly gain since February and propelling miners' shares higher.

In Singapore, the SGX AsiaClear contract surged as much as 7 percent to $72.89 a metric ton, the highest since April 10, while futures in Dalian went limit-up. The steel industry's purchasing managers' index for July, released on Monday, hit the highest in 15 months in a further signal of strong on-the-ground conditions in the world's biggest iron ore importer.

Iron ore has rebounded in recent weeks as mills in China benefit from rising product prices and strong profit margins after the government shuttered some capacity, while remaining producers make record volumes to meet demand. That's helped to absorb increased ore supplies from Brazil and Australia, aiding miners including Rio Tinto Group, BHP Billiton Ltd. and Vale SA. BNP Paribas SA has said that it's bullish on the outlook, citing an in-house mathematical model that weighs inputs including indications of China's demand and the yuan.

“It's a confluence of factors boosting iron ore at the moment, including stronger demand as indicated by the PMI data, ” Zhao Chaoyue, an analyst at China Merchants Futures Co. in Shenzhen, said via text message. “A greater driving force is the jump in steel margins, which will spur mills to keep producing, as well as expectations for further capacity cuts.”

The headline figure for the steel industry PMI was 54.9, the highest reading since April 2016, and well above the level of 50 that divides expansion from contraction. Among sub-indices, the measure of output held above 58 for a third month, while gauges of orders and new export orders both rose.

Rio Jumps

Spot ore with 62 percent content delivered to Qingdao surged 7.2 percent to $73.70 on Monday, the most since December, according to Metal Bulletin Ltd. The commodity has risen 13 percent in July, extending a 14 percent rise in June. In Sydney, Rio's shares rose 2.4 percent while Fortescue Metals Group Ltd. added 5.9 percent and BHP gained 2.1 percent. World No. 1 producer Vale was up 3.3 percent at 10:28 a.m. in Sao Paulo.

China's old-economy steel industry is booming as the government seeks to combat overcapacity and rein in its more unruly elements. State-ordered closures of induction-furnaces have spawned a shortage of reinforcement bar, a benchmark product used in construction. Rebar futures have soared 30 percent on the Shanghai Futures Exchange this year.

The recent gain in iron ore may last for some time before weakening steel-industry profitability in China causes prices to ease, Barclays Plc said in July. Last week, Goldman Sachs Group Inc. boosted its three-month forecast 27 percent to $70, while warning of lower prices in 2018.

BNP Paribas said in reports and an interview this month that its number-crunching suggests that the commodity is undervalued and should advance into the year-end. The bank's initial target is a rise to $72.50 a ton for the January SGX AsiaClear contract, which on Monday traded as high as $69.45.

--With assistance from R.T. Watson

To contact the reporter on this story: Jasmine Ng in Singapore at jng299@bloomberg.net.

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, Jake Lloyd-Smith, James Poole