Chinese iron ore and coking coal futures are putting in another stonking performance

Photo: Mohd Rasfan/AFP/Getty Images

Chinese bulk commodity futures are going nuts. Again.

Following the release of robust Chinese industrial output and urban fixed asset investment figures for October on Monday, iron ore and coking coal futures have taken flight, hitting their daily “limit up” levels before easing slightly in recent trade.

The most actively traded January 2017 iron ore future on the Dalian Commodities Exchange closed the morning session at 626.5 yuan, up 3.98% from Friday’s closing level.

It briefly traded as high as 656.5 yuan, a level not seen since mid-August 2014. The contract has now rallied 118% since mid-December last year.

Should the strength in futures persist, it suggests that the benchmark spot price may sail above the $US80 a tonne level when it is released later in the session.

It closed up 7.7% at $US79.81 a tonne on Friday, according to Metal Bulletin, extending its gain in 2016 to 83.2%.

Coking coal futures are also putting in a stonking performance, sitting up 5.4% at 1,621 yuan.

It rose to as high as 1,676 earlier in the session, the highest level on record.

From the lows of earlier this year it has gained 208%, actually lagging the move in spot markets, which has been even larger.

As is usual for extreme moves in Chinese commodity futures, the reasons for the rally are numerous yet definitive.

Some point to the rebound in Chinese fixed asset investment in October, along with an acceleration in crude steel output, as fundamental factors underpinning the move.

However, futures were already flying ahead of the release, suggesting it may be partly driven by other factors, including continued weakness in the Chinese yuan.

Earlier this month, analysts at Goldman Sachs suggested that around 60% of the rally in iron ore prices during October was driven by weakness in the yuan.

The basis for this slightly usual view stems from a noticeable pickup in volumes traded in Chinese futures, something that corresponded with renewed weakening in the yuan.

Goldman says that a limited choice of US dollar-denominated assets in China may be leading some investors to buy commodity futures to protect against further weakening in the yuan.

And the analysts think that trend can continue.

“With ample onshore money supply chasing a limited menu of accessible dollar-linked assets, continued CNY depreciation means that [futures] prices may stay above what the fundamental demand and supply suggest in coming months,” they said.

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