Chinese iron ore futures have surged in early trade

Kevork Djansezian/ Getty Images
  • Iron ore futures in China are trading limit-up 8%. That means prices cannot go higher today based on market rules.
  • The most actively-traded May 2019 contracts sits at the highest level in nearly two years.
  • Chinese markets were closed last week for Lunar New Year holidays.
  • Over this period concerns about supply disruptions from Brazil have intensified, explaining the scale of the gains seen today.

Iron ore futures in China are flying, opening “limit-up” 8% in early trade on Monday.

The May 2019 contract in Dalian currently sits at 652 yuan a tonne, up from the 604 yuan level it settled on February 1. Chinese commodity futures were closed last week for Lunar New Year holidays.

They currently trade at the highest level in nearly two years.

Thomson ReutersDalian Iron Ore May 2019 Contract.

The only thing preventing further gains at this point is that market rules do not permit it. Strong gains have also been seen in steel, coke and coking coal contracts in early trade.

SHFE Hot Rolled Coil ¥3,724 , 2.67%
SHFE Rebar ¥3,840 , 2.81%
DCE Iron Ore ¥652.00 , 7.95%
DCE Coking Coal ¥1,302.50 , 2.16%
DCE Coke ¥2,145.00 , 3.13%

The latest price spike reflects renewed concerns about supply disruptions from Brazil following a mine disaster in Brazil in late January. Combined with seasonal restocking ahead of the Spring construction season in China and that explains the scale of the increase seen today.

“Iron ore prices have surged on supply concerns after a dam collapse at Vale’s Feijao mine has resulted in further supply being curtailed,” says Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank.

“The supply disruption to date is equivalent to around 4.5% of the seaborne iron ore market.”

Dhar says the spot price for benchmark 62% iron ore fines could spike above $100 a tonne in the near-term as supply concerns mount.

However, he says whether that’s sustained in the medium-to-longer term will likely be determined by steel mill operating margins in China.

“Steel mills typically boost steel production and iron ore consumption following the Chinese New Year holiday period as construction season picks up,” Dhar says.

“The likelihood of negative margins though could see China’s steel production growth slow more than expected. Negative margins will also likely increase the preference of Chinese steel mills towards lower grade iron ore as mills look to reduce costs.”

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