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Iron ore futures are ripping higher as China's steel sector shows signs of life

Chung Sung-Jun/Getty Images

After rallying for Monday’s close by 3%, the rebound in the spot iron ore price may not have finished yet.

Upon the resumption of trade on Tuesday, the most actively traded May 2016 contract on the Dalian Commodities Exchange jumped to 380 yuan, leaving it “limit up”, or 4%, for the session.

According to exchange rules, the price cannot increase by more than 4% from its prior settlement price.

Currently the the May 2016 contract is trading at 375 yuan, up 3.02% for the session.

While the decision from the People’s Bank of China to cut its reserve requirement ratio by 0.5% to 17.0% overnight may be a contributing factor, freeing up excess cash within China’s banking system to help boost economic activity, the renewed surge in Chinese iron ore and rebar futures corresponds with signs that activity levels in China’s steel sector may be close to bottoming.

Released alongside the government’s manufacturing and non-manufacturing PMI reports for February, the separate China steel industry purchasing managers index rose by 2.3 points to 49.0, leaving it within touching distance of the 50 level that separates expansion from contraction.

Not only are activity levels in the sector on the cusp of expanding, the new orders subindex – a lead indicator on future levels of activity – rose to 50.9, leaving it in expansionary territory for the first time in years.

Despite overcapacity concerns, along with the likelihood that Chinese residential construction is likely to remain subdued in the years ahead, for whatever reason activity levels in the sector are picking up, and with them the iron ore price.

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