Chinese commodity futures just staged a gravity-defying rally

Evans Vestal Ward / Photo: Bravo / NBCU Photo Bank via Getty Images.

Chinese commodity futures, led by iron ore and coking coal, surged yet again on Tuesday.

It’s the rally that keeps on keeping on, defying every bearish forecast that seems to come its way.

The most active January 2017 iron ore future on the Dalian Commodities Exchange finished limit up 6% at 471.5 yuan, the largest move allowed based on established market rules.

It now sits at the highest level since late August.

Dalian Iron ore January 2017 Future. Source: Thomson Reuters

The moves in iron ore futures were replicated in other steel-related futures, and in some cases on an even greater scale.

Coking coal futures in Dalian also closed limit up 7% at 1,680 yuan while rebar futures traded separately on the Shanghai Futures Exchange finished with a nifty increase of 4.05%.

Bullish price action in anyone’s language.

As for the reason behind the surge in buying activity, as usual, there were many hypotheses but no definitive answers.

Continued supply shortages are one reason being cited, as was short-covering from traders. General exuberance was probably another factor — everything was rallying.

However, it is noteworthy that the move in futures — something that began in the overnight session — followed a huge profit being reported by Chinese steel giant Baosteel on Monday.

According to Reuters, net profit at the firm, a bellwether of China’s steel industry, rose 148.3% to 5.6 billion yuan ($US827.06 million) in January to September from the same period a year earlier.

“On the whole, the steel market regained some activity in the third quarter compared to the second quarter, though the sector has not emerged from its oversupply situation,” Baosteel told the Shanghai stock exchange, reports Reuters.

The result from Baosteel, indicating that capacity cuts from the government announced earlier this year are helping to restore profitability across the sector, has spurred on bullish sentiment towards other Chinese steel producers.

That, in turn, may be responsible for placing a rocket under commodity futures over the past 24 hours.

Metal Bulletin will release its daily Iron Ore Index at 9.30pm AEDT. Given the move in futures today, a move back above the $60 a tonne level for spot prices appears a near certainty.

You can read more on what drove the Chinese market today here.

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