Iron Ore-Swaps extend gains on tight Indian supplies

SINGAPORE, Nov 8?Reuters? - Iron ore forward swapsextended recent gains and offers remained strong on Monday astight Indian supplies offset mixed demand signals.

Iron ore prices stayed at 5-1/2-month highs on Friday, alsosupported by a surge in steel prices that was fueled by aglobal commodities rally after the U.S. Federal Reserve'ssecond round of quantitative easing.

The dollar is trading at its weakest in nearly a yearagainst a basket of major currencies..DXY Indian ore with 63.5 percent iron content was being offeredat $160-$162 a tonne on Monday, cost and freight in China,Chinese consultancy Mysteel said.

"We believe the price will go up further, especially nowwith the commodity boom that we're seeing," said an iron oretrader in Rizhao at eastern China's Shandong province. "We have 20,000 tonnes of 65.6 percent iron ore lump. Wejust want to hold it, we don't want to sell even though thereare inquiries everyday. We're hoping there will be a furtherincrease so we can sell it at a higher price."

Expectations of further price rises lifted forward swaps on Friday, with the November contract cleared by the Singapore Exchange SGXIOc1 climbing 1.7 percent to $157.92 a tonne, and the December contract SGXIOc2 rising 1.8 percent to $157.75 atonne.

The first-quarter contracts rose more than 1 percent to$155.75 for January SGXIOc3, $155.17 for February SGXIOc4and $154.83 for March SGXIOc5, reflecting renewed market bullishness. Swap prices had topped the benchmark index.IO62-CNI=SIwhich was steady at $153.20 a tonne, C&F China, on Friday.

The Steel Index price, based on spot transactions in China,rose 2.7 percent last week and has gained more than 30 percentsince touching near seven-month lows in July. "Any prolonged period without a strong Indian supply response will serve to keep the iron ore market tighter than would be expected, and underpin spot price levels," Macquarie Commodities Research said in a note.

Tightness in Indian supply, thanks to an ongoing ban onexports from the southern Karnataka state, has kept iron oreprices resilient amid wobbly demand from top buyer China whereoutput of many steel mills are still being curbed to meetenergy efficiency targets.

"While immediate fundamentals for iron ore look mixed atbest, we believe that the outlook is extremely tight on athree-month view," said Macquarie. "With Chinese New Year traditionally marking the peak steelinventory point, the current steel destocking cycle resulting from prolonged energy-related cutbacks is highly unseasonal. "As such, any relaxation in this stance and confidence thattargets have been met are likely to result in a rapid phase of Chinese output growth, requiring decent levels of iron oreimport."

Non-Chinese buyers may also return to the market around theturn of the year, and combined with Chinese demand, may lead toa "strong run-up" in spot prices, said Macquarie.

But the current pace of ore restocking in China mayalleviate the need for China to enter the spot market aggressively, added Macquarie, which estimates that the countrymay have restocked more than 10 million tonne of iron ore in the past two months.

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