Is the iron ore rally a false dawn?

But looks can be very deceiving. The December 11 trough of $US37 a tonne was the lowest recorded since spot assessments began in late 2008. Recent closes are just over $US11 away, with modest gains in absolute terms providing context to the more impressive percentage rise.

While iron ore has had a few good weeks since mid-January, it's very unlikely this is the start of any sustained rally. It's more likely an opportunity to go short again.

The recent price gains have been driven mainly by seasonal factors which have already likely passed. With those over, iron ore will once again be confronted with the reality of vast oversupply and tepid demand from China, buyer of about two-thirds of the world's seaborne cargoes of the commodity.

It's worth thinking back to the last time iron ore was in a so-called bull market, in the third quarter of last year. The spot price rallied almost 33 per cent to a peak of $US58.50 on September 10, after which it fell relentlessly to the low in mid-December.

What the recent price gains have done is merely steepen the backwardation of the forward curve. In iron ore, the futures market appears to be telling a more compelling story than the spot market.

China hope

Major players have consistently over-estimated Chinese steel output. The much vaunted expectation of one billion tonnes a year by 2030 by one major player is no longer mentioned. Instead there is talk of the potential in developing nations in Asia and Africa than China.

China's steel output peaked at about 823 million tonnes in 2014 and dropped to 803.8 million tonnes last year. It is heading in the other direction and there is little to suggest the trend is going to reverse.

If Beijing is successful in creating a more consumer-driven economy, it will require less steel than the construction and infrastructure model of past years. For one billion tonnes of production to come to pass China would not only have to consume steel at the pace it did in the boom years, it would have to use 25 per cent more than it did at its peak.

This seems increasingly unlikely, as China will probably be able to urbanise the millions of people it still needs to without requiring any more steel than it currently uses.

Clyde Russell is Asia Commodities and Energy Columnist with Thomson Reuters.

INDIA'S DOUBLE-EDGED SWORD - PAUL BARTHOLOMEW

The following is an edited version of a story first published in Platts Steel Raw Materials Monthly.

With China's economy having shifted down a couple of gears, iron ore and metallurgical coal producers are looking to India's steel sector to drive the next wave of demand growth.

India's economy is forecast to grow 8.2 per cent this year. The country is the world's third-largest steel producer after China and Japan and has aspirations to triple its output to 300 million metric tonnes by 2030. It also wants to lift the manufacturing sector's contribution to GDP to 25 per cent by 2022, further driving demand for steel.

But to date growth hasn't been as strong as anticipated. A key plank of the Modi government is its 'Make in India' strategy but data show India's overall finished steel output dropped 1.8 per cent on-year in April-January.

India's steel mills say they are unable to take advantage of domestic steel demand because they are being undercut by cheaper Chinese imports. The Indian government responded by firstly imposing 20 per cent safeguard duties on steel imports in September and more recently by implementing a minimum import price (MIP) regime on many steel products.

But the moves are a double-edged sword for the country's growth ambitions: while they may help a handful of larger domestic steel companies – who immediately took the opportunity to lift their prices – steel users and importers have been hit hard.

Detractors claim the MIP regime increased the cost of importing steel needed for manufacturing, such as galvanised sheet for making cars. Indeed, some argue India's development can't be put on hold while its steelmakers build up their production capacity. Why not just import some of the plentiful cheap steel in the meantime?

India overtook China last year to become Australia's largest customer of metallurgical coal. India has interests in the emerging met coal basin in Mozambique but Australian producers will benefit most if India can significantly lift its steel production.

Unlike the case with coal, India has its own iron ore but the industry has been subject to various mining and export bans following a crackdown on illegal mining in 2010. The country's decrepit infrastructure and high-transport tariff regime make it cheaper in some cases to import iron ore from Brazil than source it domestically.

But until India can sort out its perennial problems, such as lack of access to land, excessive red tape, and lack of foreign investment, the country's steel growth aspirations will not be realised. And the hopes of raw materials producers, looking for life beyond China, will be thwarted.

Paul Bartholomew is senior managing editor, Platts.