Iron Ore Prices Have Bounced Back After Bottoming Three Months Ago

ABC News reported that iron ore prices have bounced back after bottoming three months ago, reigniting many shelved expansion plans.

A once in a century mining boom has driven the Australian economy, sustained by China's huge appetite for resources such as iron ore.

However, iron ore prices dropped to a 3 year low in September, below USD 90 a tonne, amid speculation that the mining boom was over.

Mr Jonathan Barratt, commodity analyst, who runs Barratt's Bulletin said that "I think it was a lot of concerns obviously with what was happening in the [United] States, concerns about the Chinese economy, concerns about more supply coming onto the market. There was just an overall general amount of nervousness."

Now prices have surged back to USD 145 a tonne as China's economy picks up.

The latest survey of the Chinese manufacturing industry by HSBC shows it is picking up, with the Purchasing Managers' Index coming in at 51.5 last month. That indicates the industry is expanding modestly, and is the best result since May 2011.

Mr Barratt said that the Chinese economy appears to have bottomed. He said that "We've had a changeover in government, and the new leaders of the Chinese Community Party have an expansionist view."

He said that "China believes that it's got to expand in order to placate its people and obviously by expanding it requires primary imports."

He added that developments in India are also driving the iron ore price.

He said that "We've actually seen 93 mines actually shut. The Supreme Court of India actually shut the mines due to the fact that they were contaminating ground water. Now that in itself has caused a supply restriction to the market, which has certainly helped the market. Now that was a bit of a surprise, so we will probably will see a little bit more lift in the price of iron ore."

Iron ore prices have jumped by around 25% over December. That has seen iron miners, including Fortescue Metals, kick start mothballed operations, although miners are also keeping a close eye on rising costs.

Mr Barratt said that he expects prices to stay high because big miners like Rio Tinto and BHP Billiton have shelved some expansion plans.

He added that "We found it quite incredible that a lot of the big miners actually pulled back on their projects, where they actually shelved a lot of expansionary views, which in my mind was very short sighted."

He further added that "Because effectively what they're going to do is they're going to also cause a crimp in supply, because they're not going to meet market expectations and that should further sustain prices at these levels. So you're going to see the economies pick up. They're going to demand and they're not going to see the supply out there to meet that demand, so prices will continue to trade higher."