CBA: This is why iron ore is going nuts

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Out of nowhere, iron ore prices are going nuts again.

After hitting the 6% “limit up” on Tuesday, Dalian iron ore futures are marching higher yet again on Wednesday, adding an additional 5.45%.

They now sit at the highest level since early May.

In response to the epic move in futures, spot iron ore prices jumped by over 6% on Tuesday, according pricing from Metal Bulletin. Given the move in futures today, it looks like a similar outcome will arrive for spot pricing later in the session.

It’s been an amazing move, but one that few can explain.

How, from seemingly nothing, can prices suddenly surge more than 10% in less than two days of trade?

Well, amidst a sea of speculation, Vivek Dhar, a mining and energy analyst at the Commonwealth Bank, believes he has the answer.

Higher steel prices reflected expectations of improving steel margins. These expectations were driven by potential steel output cuts in the major steel producing area of Tangshan and restocking demand. Views that construction activity may improve in south China following the recent flooding also boosted hopes of stronger steel margins.

Government-enforced production cuts at the major steel producing city of Tangshan, along with hopes for improved demand.

It’s an almost identical market response to a similar move from the government ahead of a highly-publicised horticultural exposition in the same city earlier this year (which is still going). The only difference on this time is that the curtailment in steel production come ahead of a ceremony to mark the 40th anniversary of a major earthquake that struck the city later in July.

“Tangshan’s local government on Monday afternoon clarified that sinter plants and re-rollers in the city that meet environmental protection requirement can continue operating normally over July 12-24, but must halt production over July 25-31,” said analysts at Metal Bulletin in a research note released on Tuesday.

In other words, while the gains in iron ore, coking coal and rebar futures are spectacular at present, they could easily reverse just as quickly in a few weeks time, particularly with Chinese iron ore port inventories siting at elevate levels.

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