Iron ore, which posted the biggest quarterly climb on record in the final three months of 2012, may extend gains from a 14-month high as Chinese mills restock, then tumble into a bear market, according to Deutsche Bank AG.

Prices may rise to $170 a ton in the first half on demand in the biggest buyer, before falling to less than $120 as supply expands, Deutsche Bank said in a report. Ore with 62 percent content delivered to Tianjin rose to $158.50 a dry ton yesterday, the highest since October 2011, according to data from the Steel Index Ltd. A drop from $170 to $120 implies a 29 percent fall, more than the 20 percent that typically defines a bear market.

The steelmaking raw material rallied 39 percent in the three months through December, the biggest gain since at least 2009, as demand in China rebounded on optimism the world’s second-largest economy is recovering. Gross domestic product is poised to expand 8.1 percent this year, from 7.7 percent in 2012, according to the median estimate of economists surveyed last month by Bloomberg. Baoshan Iron & Steel Co. (600019), China’s largest steelmaker, said on Jan. 7 that it will raise product prices.

“We could see a minor pullback if steel mills aren’t able to pass on the full extent of these rising input costs to end users and if demand doesn’t adequately match the recent build in supplies,” Natalie Rampono, an analyst at Australia & New Zealand Banking Group Ltd., said in an interview today, without providing a specific forecast. “There could be some risk to the downside from higher input costs.”

Walsh’s View

Iron ore swaps for January fell 0.7 percent to $151 a dry ton by 11 a.m. in London, according to GFI Group Inc. That’s the highest for the coming month since October 2011, according to data from SGX Asiaclear, the largest clearer of the contracts. The forwards anticipate prices retreating to $125.50 a ton by September, GFI’s figures show.

The spike in iron ore prices is likely to be temporary, the Australian newspaper said Jan. 3, citing Sam Walsh, Rio Tinto Group’s iron ore and Australia chief executive officer. Rising Chinese demand has created conditions for a last run up in prices, Credit Suisse Group AG said Jan. 3, forecasting an average $130 a ton in the first quarter and $125 in the second.

“The theme for iron ore in 2013 could be a tale of two halves in our view: strength in H1 and weakness in H2,” Deutsche Bank analysts Daniel Brebner and Xiao Fu said in the report dated yesterday. Inventories of steel and iron ore have fallen “considerably within China over the past two quarters.”

Port Inventories

Inventories of ore held in Chinese ports declined for four straight months through to December, touching 70.54 million tons on Dec. 28, the lowest level since September 2010, according to data from Beijing Antaike Information Development Co. The reserves were at 72.97 million tons as of the week to Jan. 4.

Baoshan Iron & Steel said on Jan. 7 that it will raise hot- rolled product prices by 160 yuan ($25.70) per ton for February delivery. Jiangsu Shagang Co. raised its rebar prices Jan. 1, according to Shenyin Wanguo Futures Co. Further increases in Chinese steel prices are needed to sustain iron ore above $150 a ton, Commonwealth Bank of Australia said yesterday.

Iron ore is measured in dry tons, or metric tons less moisture. At Tianjin port moisture can account for 8 percent to 10 percent of the ore’s weight.

Australia and Brazil are the two biggest exporters and accounted for about 73 percent of world seaborne supply in 2012, according to Credit Suisse. China buys about 65 percent of seaborne shipments.

Source: Bloomberg