Chinese iron ore futures have surged today

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

Iron ore futures in China are on the charge, jumping to the highest level since April 6 in early trade on Monday.

Here’s the scoreboard at the mid-session break in China.

SHFE Rebar ¥3,724 , 4.46%
DCE Iron Ore ¥570.50 , 7.95%
DCE Coking Coal ¥1,338.50 , 5.27%
DCE Coke ¥2,074.50 , 6.38%

Everything steel-related is flying, especially iron ore futures in Dalian where the September 2017 contract has rallied by 8%, more that doubling the gains seen on Friday evening.

It currently sits “limit up”, meaning the only thing preventing further gains today is market rules at the Dalian Commodities Exchange implemented don’t permit it.

Dalian September 2017 Iron Ore Daily Chart. Source: Thomson Reuters

Rebar, coke and coking coal futures have also rallied by more than 4% for the session.

The latest bout of buying coincides with the release of another strong report card on the health of China’s steel industry in July.

The latest steel industry purchasing manager’s index (PMI) rose to 54.9 from 54.1 in June.

This PMI measures changes in activity levels across China’s steel industry from one month to the next. Anything above 50 signals activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

Along with the strong headline figure, the report’s new orders subindex — a lead indicator on activity levels looking ahead — surged to 63.1, up from 58.4 in July.

The subindex measuring inventory levels of finished steel product also pointed to strong demand, rising fractionally to 41.6 from 40.9 a month earlier.

That indicates that inventory levels continued to decline in July, albeit at a fractionally slower pace than June.

“Demand for steel products has been strong in July, especially during the first half of the month when restocking by downstream consumers was active due to rallying steel prices,” said China’s Federation of Logistics & Purchasing (CFLP) following the release of the July report.

The combination of strong demand and low inventory levels helps explain the strength in Chinese rebar, iron ore and coking coal futures seen today.

There’s plenty of demand and not much supply, encouraging Chinese steel mills to up production levels.

Speculation that environmental inspections by Chinese regulators may curtail steel production may be also contributing to the hefty gains seen in futures today.