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From loathed to loved: Iron rallies as quality ore is gobbled up

[MELBOURNE] Iron ore's gone from loathed to loved. The commodity is headed for a third weekly gain that's lifted prices to the highest in almost five months on lower port stockpiles in China and speculation local production is contracting.

Ore of benchmark-grade 62 per cent content delivered to Qingdao rose 0.3 per cent to US$65.61 a dry metric ton on Thursday, according to Metal Bulletin Ltd. That's the highest level since Jan 23 and trimmed losses this year to 7.9 per cent. A third consecutive weekly climb would be the longest run since April.

Iron ore's roller-coaster ride this year saw prices sink to a decade-low in early April on rising low-cost supply from the top producers and concern demand in China may falter as growth slowed. Tumbling stockpiles in the biggest buyer, as imports missed expectations, helped to spur back-to-back gains in April and May, and prices extended the rally into June. Goldman Sachs Group Inc. is among banks predicting the factors that hurt prices in the first quarter will soon reassert themselves.

"There's been a significant destocking gone on and that would be why we've seen the iron ore price rising, seasonal factors and the fact that they are destocking," said David Lennox, a resource analyst at Fat Prophets in Sydney. "There's a lack of inventory in China."

Iron ore gained 28 per cent this quarter and is set for the first such advance since the final three months of 2013. Its performance beat all constituents in the Bloomberg Commodity Index, which added 3.1 per cent in the period, led by West Texas Intermediate crude oil, gasoline and Brent.

Holdings at ports in China fell 13 per cent to 85.4 million tons last month, and extended the drop in the first week of June to 83.8 million, according to Shanghai Steelhome Information Technology Co. That's the lowest since November 2013.

"Stockpiles have been lower quality," said Mr Lennox. "So the 62 per cent iron has been basically just gobbled up as soon as it comes into the country."

Port reserves may rise as some higher-cost mines are seen restarting, the China Iron & Steel Association said in a report on its website on Friday. Prices may fluctuate as supply still exceeded demand amid declining steel output, it said.

Chinese futures have also climbed. Most-active prices on the Dalian Commodity Exchange traded as high as 458.5 yuan (US$74) a ton on June 11, the highest level since March 13, rebounding from a low of 368 yuan on April 10. Ore for September was 1.5 per cent lower at 448 yuan on Friday.

The market will tighten in the second half as China imports more and mines less, according to Vale SA Chief Executive Officer Murilo Ferreira. More Chinese miners than people realise have left, he said on Wednesday, predicting that in terms of steel, "we will have a better second half in China."

Crude-steel production fell 1.7 per cent to 69.95 million tons in May from a year earlier, according to China's National Bureau of Statistics. Output over the first five months shrank 1.6 per cent. The country accounts for half of global supply.

While prices rebounded this quarter they remain about 30 per cent below their level 12 months ago after BHP Billiton Ltd, Rio Tinto Group and Brazil's Vale boosted capacity, spurring concern supplies will exceed demand. In many markets, recently installed low-cost supply can now be stretched to meet demand, BHP Chief Executive Officer Andrew Mackenzie said this month.

The rally won't last as supplies will expand further, according to Goldman. The advance is living on borrowed time, Christian Lelong and Amber Cai said in a note Monday.

BLOOMBERG