The prices of iron ore are not expected to drop despite a predicted price collapse as demand is likely to surge with China’s shift to better quality raw materials, according to Rio Tinto Group, the world’s second-largest exporter of iron ore.
"I wouldn't necessarily say that it's going to fall off a cliff," Rio chief financial officer Chris Lynch said in an interview on Monday, Feb. 13. "I guess the key issue is that we have to be robust in case the price goes up, down or sideways, and that's what we set out our business to do."
Bloomberg reported that demand for iron ore climbed in 2016 as China's mills made a record import. About 60 percent of Rio's profits last year were attributed to iron ore.
Lynch said that the shift to raw materials with higher-quality are benefiting global exporters while steelmakers aim for efficiency and low-polluting materials.
"There's another fundamental shift going on in China and that's the preference for the more efficient and less polluting end of the industry," Lynch said in the interview.
According to Lynch, Rio and its competitors will support the mills' switch to higher-quality imported ore, especially China's shift from dependence on commodities to consumption and services with greater attention on construction and infrastructure.
Citigroup Group said that the rising supply from Australia and Brazil will make the adjustments on raw materials, which traded highest in more than two years, driven by China's rising steel output and consumption.
On Friday, Feb. 10, ore with 62 percent rose to $86.62 per dry ton in Qingdao, the highest since Sept. 2014, Metal Bulletin Ltd said.
Last month, the producer price inflation in China rose to near six-year highs, amid a rally in steel prices and other raw materials, which gave rise to speculation that global manufacturing activity is set to build momentum, the Financial Review said.
However, mills in China have to close temporarily as a result of environmental inspections by Chinese authorities as they plan to cut steel overcapacity in 28 cities across five regions as well as intensify the war on smog.
Traders said that the demand for steel has picked up after the Lunar New Year and is expected to strengthen in the coming months.