Iron-Ore Producers Boost Output as Chinese Demand Rises

By JEFFREY SPARSHOTT and ALEX MACDONALD

LONDON -- At least two more iron-ore producers announced output increases this month, underscoring how signs of strong Chinese demand for the raw material are spilling across the industry and pushing spot-metal prices higher.

It is a sharp reversal from last year, when Western companies curtailed mining for iron ore, a vital ingredient for making steel, as the global economy slowed, steel demand all but collapsed and spot iron-ore prices sank.

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Reuters

Chinese demand for iron ore seems to be picking up. Here, a steel and iron factory in Shanxi province in March.

But China has begun restocking iron ore, in part through imports. Still, company officials and analysts say it is unclear whether this will translate into a similar increase in Chinese steel production. If it doesn't, iron-ore prices, which last week reached the highest level in nearly four months, could fall sharply, as demand elsewhere remains weak.

"We haven't seen any pickup in [demand for iron ore in] Europe or North America," said Magnus Ericsson, president of Raw Materials Group.

Two relatively small producers, Russian steelmaker Severstal JSC and Swedish iron-ore producer LKAB, recently said they would increase iron-ore production. Another miner, Brazil's MMX Mineracao e Metalicos SA said in May that it would restart its Corumba mine, shuttered since December 2008.

Severstal said it is operating Russian iron-ore assets at 80% of capacity, up from 30% in January. "We believe this will improve further and we see June as the month when we will have full capacity utilization" in Russia, said Boris Granovsky, head of strategy at Severstal Resources, in a Webcast presentation last week.

LKAB, a high-grade iron-ore producer, said it would shorten its planned summer shutdown to about five weeks from eight weeks to satisfy new orders, mainly from Asia.

BHP Billiton, one of the biggest suppliers of iron ore to China, didn't cut output from western Australia, its main ore site, when demand fell last year. But rival Rio Tinto PLC curtailed output at its western Australian operations to reflect weaker demand in the fourth quarter. This year, its Pilbara operations are operating near capacity.

It isn't clear whether China and the rest of the world will continue buying at the same pace.

China, the world's largest steel producer and iron-ore consumer, imported 53.46 million tons of iron ore in May, down 6.2% from 57 million tons in April, according to preliminary data from the General Administration of Customs. That was up 37% from 38.91 million tons in May 2008.

Prices for iron ore on Friday stood at $75 a metric ton, including cost, freight and insurance, according to Metal Bulletin data, driven largely by Chinese demand. That is down from $76.50 a week earlier but up 20% from eight weeks ago.

While China is importing more iron ore, it isn't producing a lot more steel. "Iron ore imports are up 25% [year to date]. Yet steel production is up a more modest 3%. The explanation is falling domestic production and inventory accumulation," wrote Citigroup analyst Alan Heap in a recent research note.

Write to Jeffrey Sparshott at jeffrey.sparshott@dowjones.com and Alex MacDonald at alex.macdonald@dowjones.com