Rebar Points to Fresh Iron Ore Pullback

The price of rebar, or reinforced steel, points to a fresh downturn in the price of iron ore, the key commodity for the world’s largest mega-miners, Rio Tinto (RIO) and BHP Billiton (BLT).

Iron ore has collapsed dramatically from a record high of $185 per tonne in 2011 to a decade low of $47.08 in April, but has since staged a recovery, fetching $61.30 in Chinese ports this week.

The rebound has supported BHP and in particular Rio, which relies on iron ore for 50 per cent of its revenue and a staggering 72 per cent of its profit, but rebar prices suggest the support may prove fleeting.

Rebar reliably moves in tandem with seaborne iron ore, but since April, the price link has broken down: iron ore has bounced, whilst rebar has remained under pressure, sitting close to 12-year lows. Coking coal, iron ore’s sister ingredient in steel, is also trading at its lowest level in more than a decade.

“It seems inconceivable that the iron ore price can maintain current (relatively elevated) levels, while the rebar price continues to decline,” according to analysts at Investec. “Something is wrong, and the rebar price is sending a strong message.”

Chinese steel mills, the world’s largest buyer of iron ore and the biggest seller of rebar, have trimmed output this year, reducing demand at a time when Rio, BHP and Brazil’s iron ore giant Vale continue to escalate shipments. Fortescue, the world’s fourth largest exporter, is also cranking-up output in a paradoxical effort to offset lower prices with volume.

Miners have doggishly stuck to output hikes, hoping to squeeze smaller producers out of the market, whilst making a price recovery dependent on an uptick in China. The country’s monthly iron ore import figures continue to fall however, with Goldman Sachs predicting prices below $50 per tonne.

“This rally is living on borrowed time,” Goldman has told clients. Trading in Rio opened on Friday at £27.17.

Zijin the Greatest

Quietly and without fanfare, China-based Zijin Mining has become the world’s largest gold mining company, overtaking Barrick Gold by market capitalisation.

The news has gone unreported in both China and North America, but was spotted by eagle-eyed analysts at Scotiabank in Toronto. In trading in Hong Kong and Shanghai, Zijin’s market cap has gone through HK$130bn, equal to around $17bn, now comfortably ahead of Barrick, valued at $13bn.

The rise follows a string of takeover deals by Zijin, including a $298m bid for half of Barrick’s bonanza-grade Porgera gold mine in Papua New Guinea.

A large chunk of Zijin’s gold output comes from refining, but thanks to a mammoth spending spree by the company and its chairman Chen Jinghe, Zijin is also beefing-up on mines. On Monday, it announced plans to make a takeover offer for ASX-listed Phoenix Gold.