Iron ore prices lifted on Thursday morning for the third consecutive day after weeks of startling price declines to a six-year low but analysts say its recovery will be short-lived.
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Iron ore was fetching $US55.89 a tonne on Thursday morning, up 4.57 per cent from Wednesday. However, its price is still down 4 per cent for the month.
ANZ analysts said the 20 per cent lift from a low of $US45 in early July was driven by expectations of increased demand and a more stable Chinese steel market.
"The increase in price was supported by the speculation that steel mills are buying iron ore from ports, against the seasonal trend. Steel prices have also stabilised and firmed modestly in recent weeks, supporting sentiment in the iron ore market."
At the beginning of the rally on Tuesday, Goldman Sachs commodity analyst Christian Lelong said it was due to a temporary slowing in Australian shipments caused by delay, which drove prices up as supplies ran low at ports and steel mills.
However, even if strengthening demand continues, its effect on the price could be complicated as global supply is forecast to climb.
"The rebound will be short-term and lower prices are expected. We still have an oversupply market," Clarkson iron ore derivatives broker Kelly Teoh told Bloomberg.
CMC Markets chief analyst Ric Spooner said the current rally would likely be capped as new mines began exporting.
"Production from Gina Rinehart's Roy Hill project, for example is due to begin later this year and then to ramp up significantly over the next two years."
UBS analyst Daniel Morgan also cited the output of Roy Hill as a catalyst to watch in the coming months of continued volatility. Mr Morgan added he expected the price to remain volatile throughout the year but to average lower at about $US50 a tonne.
ASX-listed iron ore exporters followed the commodity price up on Thursday morning. Diversified miner BHP Billiton added 2.2 per cent while Rio Tinto added 2.8 per cent while pure play Fortescue Metals Group added 1.1 per cent in early trading. All, however, remain down for the week.
"Locally today a boost for the beaten down local miners with some good performance from the likes of BHP, Fortescue and Rio Tinto, with FMG continuing its big bounce from yesterday however there is still major question marks on the operations of the junior miners given the volatility of the spot price and there higher costs of production," Quay Equities head of trading Tristan Knell said.
