Iron ore rallying most since 2010 as China rebounds

Lowest Level

Steel production in China, equal to 47 percent of world output in the first 11 months, will expand another 6 percent in 2013, Credit Suisse Group AG estimates. Ore inventories at Chinese ports dropped 19 percent since the end of October to 71.32 million tons, the lowest level in more than two years, according to Beijing Antaike Information Development Co., a state-backed research company. That may spur imports as steel plants restock, says UBS AG.

China’s manufacturing may expand at a faster pace in December, according to a preliminary reading on Dec. 14 by HSBC Holdings Plc and Markit Economics, adding to signs the economy is strengthening as a new leadership takes power. The government has approved projects for the construction of about 2,000 kilometers (1,250 miles) of roads, subways in 18 cities and extra spending on railways.

Steel Association

While China is rebounding, the 17-nation euro area and Japan have slipped back into recessions. They represent a combined 16 percent of global steel output, according to the Brussels-based World Steel Association. Steel production in the 27-nation European Union retreated 5.3 percent in November from a year earlier and in Japan fell 2.3 percent, the WSA estimates.

Demand also may weaken in the U.S., the third-largest steelmaker, should lawmakers fail to reach an agreement on more than $600 billion of tax increases and spending cuts that start automatically next month. The Congressional Budget Office says the lack of an accord risks sending the world’s biggest economy back into a recession. President Barack Obama is due back in Washington from vacation today, according to a White House aide, as Congress returns to continue talks on a budget agreement.

Current ore prices are more than double the average cost of production in Australia and Brazil, the two biggest exporters, and above the $100 that Chinese mining companies pay to extract every ton, according to estimates from Credit Suisse and Australia & New Zealand Banking Group Ltd. That may spur Chinese miners to raise supply, diminishing demand for imports.