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Go, iron ore, go

Just a wittle more, a wittle more...

Yes Virginia, just another US$12.71 per tonne (6.6%) and the spot price of iron ore will be line ball with the all-time high of US$191.70 a tonne it set way back a decade earlier (February 2011).

For sure, there were daily ups and downs and round and rounds, but iron ore's overall trend remains on the up and up. It's currently fetching US$178.99/tonne - that's a 14.9% increase from the start of 2021 and a stupendous 128.5% surge from the pandemic low of US$78.33 recorded in March last year.

No prize for the whys and wherefores but as it was then, it's still China's need for steel that's driving the iron ore price higher.

Reuters reports that: "China's crude steel output rose 12.9% in the first two months of 2021 compared with a year earlier, as steel mills increased production in expectation of more robust demand from the construction and manufacturing sectors."

"Average daily output stood at 2.97 million tonnes, up from 2.94 million tonnes in December and compared with a daily average of 2.58 million tonnes in Jan-Feb, 2020, according to Reuters calculations."

For a very brief while, there were concerns that China's efforts to curb output to reduce carbon emissions and pollution from steel manufacturers would crimp demand for iron ore. But this had been negated by rising demand elsewhere.

Reuters points out that "imports by the rest of the world are rising, with ex-China arrivals estimated at 41.25 million tonnes in March, up from 34.43 million in February and 35.76 million in January" - a likely offshoot of the strengthening global recovery and world government's stimulus and counter-cyclical efforts to sustain this.

Besides these, China's anti-pollution drive has driven steel producers to buy higher quality iron ore exports from Australia and Brazil.

But it's the mines down under that's reaping most of the benefits - despite Australia's brewing diplomatic, political and trade tensions with Beijing - and because Brazil's pre-occupied with battling the still rising cases of coronavirus infections within its shores.

What Australia is losing in trade volumes -- the latest international merchandise trade data show that Australia's total exports to China dropped by 8.0% in February 2021 from a year ago, with iron ore exports dropping by 12.0% -- it's making up for higher demand from the others ex-China and surging iron ore prices.

The Lucky Country is getting luckier. For not only will the higher price of its major commodity export contribute to its growth renaissance, it'll also reduce Australia's budget deficit.

In its Mid-Year Economic and Fiscal Outlook (MYEFO) handed down in December 2020, the Treasury forecast that iron ore prices will drop to US$55.0 per tonne by the end of September 2021 quarter. Iron ore prices are now more than three times that.

Sensitivity analysis conducted by the Australian Treasury in the 2020-21 Budget shows that for every US$10/tonne increase in the price of iron ore from the forecast US$55/tonne, improves the budget bottom line by A$3.7 billion.

You do the math.

Read our full COVID-19 news coverage and analysis here.