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High-grade iron ore may spike to US$100 a tonne


HIGH-GRADE iron ore may spike to US$100 a tonne as China intensifies a clampdown on pollution by restraining industrial activity, adding further momentum to a trend that has reshaped the global market in recent years and driven buyers in Asia's top economy to seek out better-quality material.

After sinking in March, top-quality ore with 65 per cent iron content gained every month, hitting US$91 a tonne last Friday, and keeping it in positive territory this year even as global trade frictions mounted, according to, a news portal for the steel market in China. In contrast, benchmark 62 per cent ore has flat-lined in the US$60s, and is down 14 per cent. The divergence has exploded the gap between the two.

"Short-term spikes to this level are entirely possible in response to Chinese production and policy announcements," said Paul Gray, vice-president for iron ore markets at Wood Mackenzie Ltd, referring to the US$100 mark for top-grade prices. While WoodMac's view is that high-quality ore will not trade in three figures on a sustainable basis, spreads are expected to remain wide.

In a market characterised by extraordinary quantity - global iron ore shipments top 1.6 billion tonnes a year - the sustained push for quality among buyers stands to benefit top miners Rio Tinto Group and BHP Billiton Ltd in Australia, as well as Brazil's Vale SA as it brings on new high-grade deposits. After imposing unprecedented curbs on mills last winter, China is ratcheting up the pressure, expanding the area that will be affected by production restrictions and cutting capacity in Tangshan, a key steel-making hub.

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"There's been some structural shift that seems to be a preference for higher grade," according to Iron Ore Research Pty director Philip Kirchlechner, who said that costlier coking coal and elevated mill margins were also driving the trend. "The premiums, they will not be reduced. I will expect the premiums for high-grade ore to be around the current levels and not decline."

At WoodMac, Mr Gray expects the spread between high-grade ore and benchmark material to average 26 per cent during the Chinese winter, slightly higher than last time around. "Our-longer term view is for the spread between 62 per cent and 65 per cent to narrow slightly as Chinese steel margins contract," he said.

Using higher-content ore - and supplies with lower levels of impurities, especially alumina - enables mills to produce more steel while cutting back on pollutants. Policymakers in China are stepping up their environmental push, and this month announced a three-year masterplan to intensify that push.

The resilience of iron ore compared with other commodities was in view on Monday as copper, nickel and zinc lost ground in London as trade concerns mounted, while SGX AsiaClear iron ore futures rose. The benchmark SGX iron contract was 0.3 per cent higher at US$63.65 a tonne, up for the fifth day in six.

The rising importance of quality has been flagged by Australia, the top iron ore shipper. Earlier this month, the Department of Industry, Innovation & Science said that while spreads may narrow as steel production ramps up in China, they will not snap back to historical levels given the "ongoing government push to improve air quality through increasingly stringent air pollution policies." BLOOMBERG

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