Iron Ore-Flat prices, but rally may resume when China returns

By Manolo Serapio Jr

SINGAPORE Feb 7 (Reuters) - Thin spot iron ore trading activity on Monday kept prices steady near record highs with top buyer China off the market for the Lunar New Year holiday.

Prices are expected to resume their rally when the Chinese markets reopen on Wednesday on persistent worries about tight supplies through the first half of 2011.

"There is little expansion potential in the global supply chain while rampant Chinese steel production growth is bolstering demand conditions," Macquarie Research said in a note.

"We would expect the price to keep edging upwards post Chinese New Year, with $200/tonne in sight."

Price indexes, based on spot transactions in China, were unchanged on Friday but stayed near record peaks touched last month.

The Steel Index 62 percent iron ore benchmark .IO62-CNI=SI was flat at $185.60 a tonne, cost and freight delivered to China, just a tad off the record $185.70 reached on Jan. 21.

Metal Bulletin's 62 percent index .IO62-CNO=MB stood at $183.36, about a dollar away from its all-time high of $184.43 hit on Jan. 24.

The sharp decline in Brazil's iron ore exports last month along with continuously tight cargoes from India suggest that the iron ore market "will remain in an extremely tight situation" in the first half of the year, said Macquarie.

Iron ore exports from Brazil, the world's No. 2 supplier of the steelmaking ingredient, fell 29 percent in January from the previous month, as heavy rains disrupted shipments.

Supplies from India, the world's No. 3 exporter, had been tight because of a continuing ban on shipments from its Karnataka state. Macquarie said while a possible lifting of the ban this month could bring some material back to the market, the revamped state rules may make paperwork more rigorous and curb shipments compared to last year.

This could open the way for more exports from smaller suppliers led by Iran.

"As a result, 2011 is set to be a year where incremental tonnages from smaller suppliers will be crucial in keeping the market in balance amid immediate need for iron units to balance the books," said Macquarie.

"The need for this ore is representative of an undersupplied market, and will keep the iron ore price well underpinned through the usual price cycles we are likely to see in 2011." (Reporting by Manolo Serapio Jr; Editing by Manash Goswami)