Spot prices for Australian iron ore, a benchmark for Asia, jumped 20% over the past month to $US 67 a ton. Australian-produced coking coal also climbed 15% over the same period to $US 160 per ton.
In Japan, operators of electric arc furnaces are buying scrap metal at around 28,000 yen ($US 249) a ton, up nearly 20% from May.
These increases all stem from China's burgeoning demand. The country imported more than 3.15 million tons of iron ore daily in June, an all-time record. The government had halted production of poor-quality steel products until last month, which created shortages of shaped steel for construction as well as steel sheets.
Beijing's economic stimulus program also spurred development of condos and other real estate. Chinese blast and electric furnaces that meet environmental standards are boosting production as steel prices rise, a source from a major trading house reported.
This activity has greatly diminished supplies of Chinese scrap and semi-processed crude steel. Electric arc steel mills in Southeast Asia have given up procuring scrap from China and have turned to Japanese scrap, which has become cheaper.
"There is a sense of disconnect between the Japanese steel market and the rise of overseas steel and raw material," said Kiyoshi Imamura, managing director at Tokyo Steel Manufacturing.
In Japan, raw materials and fuel prices were climbing until last year, and steelmakers have been looking to pass on those extra costs to price tags for finished products. But domestic steel trends have been slow to pick up, and opportunities to hike prices are rare. The inability to transfer expenses undermines profitability.
The current upsurge in raw material prices, however, is not widely seen as sustainable. The iron ore market is in for a long-term supply glut as new mines start producing. In China, port inventories are at record levels after traders bought up iron ore ahead of the anticipated steel rally.
The monetary squeeze by Chinese financial authorities could also sap the appetite for iron ore. "Chinese banks have tightened credit lines to large steel mills, and therefore mills are forced to purchase ores in cash," Citigroup said. The U.S. financial giant predicts the price will fall briefly into the $US 40 range.
Demand for scrap in Japan is also waning as electric arc steelworks cut production this month. "There is a good chance scrap prices will start falling starting in mid-August," said a procurement manager at one mill.
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