Chinese steel demand boosts iron ore Iron ore prices hit a five-month high, signalling that demand from Chinese steel mills - the leading consumers of the commodity - has recovered. Excess inventories that had weighed on the market in the middle part of the year have now been run down. The benchmark for iron ore delivered to China - with 62 per cent iron content - rallied to $132.75 a tonne, according to price reporting agency Platts, the highest since mid-July. The commodity, used to produce steel, is almost 50 per cent higher from this year's low of $88.75 a tonne, hit in early September. Better economic news also supported the market. The rise in December's HSBC Flash PMI for the manufacturing sector in China to 50.9, its highest level for 14 months, boosted confidence among traders. Analysts at Macquarie said the price moves in iron ore were "a classical V-shaped recovery" and reflected the fall and rise in demand. Chinese mills found themselves with growing inventories as crucial construction demand for steel faltered earlier in the year. Colin Hamilton, head of commodities research at Macquarie in London, said small Chinese mills, which had run down their inventories, had now restocked. Inventory levels were at about 17 days" worth of consumption when the iron ore price fell below $90 in September and had rebounded to a more normal level of about 28 days, he added. This has cast some doubt on a sharp rally in iron ore prices from the current levels. "The upside in iron ore prices from current levels related to restock alone is limited," he said, forecasting an average $140 a tonne for the first quarter. The rebound will be a relief to large mining groups, which have large exposure to the commodity. These include Vale of Brazil, London-listed Rio Tinto, BHP Billiton and Anglo American, as well as Japanese trading companies such as Mitsui & Co. In spite of the rebound in iron ore, international prices for coking coal, also used in steel production, had remained subdued, said analysts. Miners have recently settled contracts at about $165 a tonne for benchmark coking coal from Australia, below current prices in the domestic Chinese market of roughly $180 a tonne. Analysts said the international coking coal prices could rise in the next few months towards $190-$200 a tonne. "[Coking] coal is the catch-up trade," said Mr Hamilton.