Iron ore gains 7 per cent over the week

Iron ore has registered its biggest weekly gain of the year, as Chinese steel mills looked to replenish stocks of the steel-makng ingredient.

Benchmark ore for immediate delivery into China rose 70 cents to $50.70 tonne on Friday, according to a price assessment by The Steel Index, taking gains over the week to 7 per cent.

However, the commodity, which drives the profitability of several major mining houses including BHP Billiton and Rio Tinto, is still down almost 30 per cent this year

In spite of last week's rally, the outlook for the commodity remains bleak. Figures released on Wednesday showed China's economy has expanded at its slowest pace in six years in the first quarter held back by a slowdown in construction.

China's gross domestic product grew 7 per cent in the first three months of 2015 according to the country's National Bureau of Statistics - the weakest quarterly expansion since the depths of the global financial crisis in early 2009.

Even though growth is slowing in China, the world's biggest steel producer and consumer of seaborne iron ore, leading iron ore producers, which have spent billions of dollars building mines, railways and ports, have no intention of slowing supply.

Rio's chairman Jan du Plessis told the company's annual general meeting on Thursday that it was focused on reducing costs.

"The reality is tough out there and as an organisation all that we can do is to respond as best as we can in a tough environment," he said. Rio is the world's lowest cost supplier of iron ore from its mines in Western Australia.

In a report published earlier this week Citi said it expected iron ore prices to fall to $36 in the third quarter of the year and stay below $40 for the year, citing slowing Chinese demand and rising supply growth.

"We forecast incremental export production growth of over 110m tonnes in 2015 of which 68m tonnes alone should come from Rio Tinto. New Chinese mines are still coming online as well, with over 60m tonnes in the pipeline," the report read.

Goldman Sachs also slashed its iron ore forecast last week, saying that prices could revert to their pre-2004 levels of around $300 a tonne.

"In our view, Chinese steel consumption has already overshot and it will contract until it reaches a sustainable rate. From a producer's perspective, the end of the bull market will prove to be as painful as the start of the bull market was alluring."

China's super charged growth saw iron ore prices increase fivefold in real terms between 2004 and 2011, according to Goldman. Date collected by the Steel Index, shows spot prices peaked at around $190 a tonne in February 2011.

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