Iron ore price hits A$150 a tonne

But it may not last, as Chinese steel production is cut

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published August 14, 2013 9:07 am AEST

But it's unlikely to last, according to some analysts.

Overnight, the spot iron ore price rose US$5.60 to US$138.70 a tonne, in Australian dollar terms that's A$152.42 per tonne, using the current exchange rate of around US 91 cents. We could see upgrades to profit forecasts for major Australian iron ore miners including BHP Billiton (ASX:BHP), Rio Tinto (ASX:RIO), Fortescue Metals Group (ASX:FMG) as well as juniors such as Atlas Iron (ASX:AGO).

If the price persists at these levels, earnings per share forecasts could rise dramatically for the major miners, according to some analysts, and in Atlas's case, could double.

But others are not so sure, with China heading into a period of seasonal weakness, as steel production is cut. This time last year, the spot iron ore price fell to US$86.70 a tonne briefly in September, before rebounding. UBS analyst Tom Price has told the Australian Financial Review that we could see iron ore below US$70 a tonne for a short period of time. "When everyone thinks it is the end of the world, it will rally again for the pre-winter re-stock event", he said.

For Rio, the high price is a boon, with the company looking to expand output to $360 million tonnes, an increase of around 70 million tonnes. Fortescue will also benefit and the company's planned sale of a minority stake in its infrastructure assets may be put back on the shelf, as it looks to keep full control over its assets.

Fortescue's operations director David Woodall recently noted that China's steel production will go from breakneck speed to one that is merely fast, with steel demand being sustained in the short, medium and longer term.

Foolish takeaway

The one issue that may have been overlooked in all this is the rising supply of iron ore. While China may well continue to produce growing amounts of steel, the supply of iron ore could easily outstrip demand for the commodity, resulting in much lower prices.

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Motley Fool writer/analyst Mike King owns shares in BHP.

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