Iron Ore Prices to Rise 9% in Q1 2011

Montreal, Canada

Iron ore prices – subject to intense price negotiations this year – are set to rise by 9% in January as tight supplies push steel prices higher.

Iron ore, used to make steel and ranked as the single biggest industry within the raw materials complex, sets the stage for price hikes next year and will likely force the Chinese to pay up for fresh supplies. China is the world’s largest importer of steel.

India is the single most determinant cause of price increases in 2011. India, one of the world’s largest iron ore exporters, is in the midst of tight supplies following a court order to ban exports in Karnataka state.

Spot benchmark iron ore prices rose to $167.80 a ton on Tuesday – the highest level since last May and up 40% since hitting a low earlier this year at $117.60.

Like copper, also viewed as an important future gauge of economic growth, iron ore prices are suggesting an extended global expansion in 2011 as manufacturing data from several countries this week points to an accelerated growth cycle.

China and India both reported strong purchasing managers index statistics recently; India enjoyed a strong 9% GDP growth rate in Q3. In Germany, manufacturing is booming – an oddity considering the dislocations now underway across the weaker periphery in the eurozone.

As raw industrial prices continue to advance and recover off their June-July lows, bond markets just about everywhere are falling. Bond yields have risen sharply since early October – despite the Fed’s QE II announcement and its recent purchase of Treasury securities this month.

The paradox facing global investors is that while most of the West is struggling with a growing sovereign debt crisis, which is deflationary, the emerging markets are beating a different path; inflation, not deflation, is China’s problem along with many other economies using the dollar as a peg or semi-peg for monetary policy.

The big risk for investors is that Europe’s government debt crisis spreads to the inner core, threatening the recovery since 2009 and forcing more governments to cut spending. And just how much can the Germans tolerate in terms of state guarantees? The Germans cannot bail out the entire eurozone without becoming heavily debt-burdened themselves.

For now, markets believe Germany and the rest of Europe will survive without a major default or debt restructuring. I suspect this is naïve and invocative of a dangerous macro environment whereby state coffers are up to their eyeballs in debt and markets forcing a solvency crisis as we head into 2011 shortly. Steel prices don’t believe the global recovery is in peril. I’m not so sure.

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