Within a couple of days first Fortescue Metals' Nev Power and then Rio Tinto's Sam Walsh have warned that the remarkable rebound in iron ore prices won't last. Others are not as sure.
Earlier this week, Power attributed the sharp rise in iron ore prices above USD 140 a tonne to supply shortages as a result of the northern winter and China's new leadership's pledge late last year that stable and relatively fast economic growth was its objective for 2013.
Walsh followed up in an interview with The Australian by saying the price spike was likely to be temporary. His explanation for the recent rise was that it was due to short term factors like restocking and nervousness among the steel mills about the imminent cyclone season and its potential impact on Pilbara production.
That the mills would be restocking now would make some sense, given that it was destocking that helped drive the price down below USD 88 a tonne in September last year.
However, for the miners and the Australian economy, what matters more than short term shifts in demand is the medium to longer term supply and demand equation. There are conflicting views about how that might play out, with some analysts very optimistic about the strength of demand through this year and the price expectations that could generate and others far more pessimistic. The range of price forecasts starts below USD 80 a tonne and tops out at about USD 170.
The key is obviously China's economy, where the policymakers have targeted growth of about 8% this year. They have, importantly, approved significant steel intensive infrastructure spending as part of the growth agenda and there are also signs that China's manufacturing sector is again growing.
But with the euro zone in recession and riddled with severe structural challenges that will take years, if not decades, to resolve, the US this week deferring rather than addressing its own fundamental fiscal challenges and Japan still flat lining, it is unlikely that China's economy could return to the levels of growth experienced pre crisis.
