Is this spike ‘one last hoorah’ for iron ore?

The price of iron ore has jumped to a fresh 15-month high on the back of a buying spree from Chinese steel mills, but analysts are divided over how long the surge will last.

The benchmark price for the bulk commodity is trading at $US158.50, helping keep the Australian dollar strong at about $US1.05 in morning trade.

The recent surge underlines the volatility the world’s largest consumer of iron ore imparts on the commodity’s price. Iron ore slumped at an alarming rate to $US86.70 a tonne just last September as Chinese steel producers pared back their inventories as an industry-wide crisis threatened to take hold.

Now anticipating steadier economic conditions in China, the same steel mills are aggressively restocking, pushing the iron ore price more than 80 per cent higher in barely four months.

But Credit Suisse analysts are tipping the iron ore price spike to be merely ‘‘one last hoorah’’, with the initial buoyancy at the start of this year to give way to a ‘‘gradual price fade’’ toward $US90 a tonne by 2015.

It says commodity prices were likely to remain strong for the next few months, but to begin to retreat by the second half of this year. The prediction is consistent with a huge expansion of iron ore supply expected to come online in the next two years.

‘‘For this commodity, the long boom is fading,’’ the investment bank said in a research note.

‘‘However, a steady improvement in Chinese demand – and faint stability elsewhere – have created the conditions for one last run up in iron ore prices before new supply causes them to ebbed back towards our long-run mean.’’

Credit Suisse’s projection is not far off the lows of $US86.70 a tonne seen last September, which pushed higher-cost producers, including Fortescue, dangerously close to the brink.

‘‘The plunge in prices in [the third quarter last year] was short-lived but we still believe it signals a turning point for iron ore, with little prospect of a return to previous cycle peaks,’’ Credit Suisse said.

The bank predicts higher-cost producers, particularly Chinese private miners, will be forced to close and for China’s domestic supply to be cut in half by 2015.

A series of worrying economic data for China last year looked to have taken a positive turn by the year’s end, but economists will be keeping a close watch on a slew of fresh data due for release next week. Statistics from the China Iron and Steel Association showed that major Chinese steel firms returned to profits in November for the first time in four months.

But Chinese steel analyst Xu Guangjian said the local industry was still struggling. Few mills have shut because the sector is state-owned and subsidised, though smaller players in the industry are being consolidated into larger steel producers.

“Most steel companies are just breaking even,” Mr Xu said.

“The price of iron ore continues to be high and there is no strong demand originating from downstream industries such as the property, electric home appliance and automobile industries.”

The original release of this article first appeared on the website of Hangzhou Night Net.

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