Iron ore jumps to a 26-month high, now up 120% in a year

Photo by Jeff Gross/Getty Images

A year ago iron ore prices were unravelling, sliding to just $38.30 a tonne, the lowest level seen since daily spot pricing first began in mid-2009.

Now, just over a year later, it’s just hit the highest level seen in 26 months.

It’s been quite a turnaround in the space of 12 months.

According to Metal Bulletin, the spot price for benchmark 62% fines surged by a further 2.4% to $83.58 a tonne on Monday, leaving it trading at the highest level since October 14, 2014.

So far in 2016, it’s added 91.8%. From the lows of a year ago, that increase extends to 118%.

Stripping out transportation costs, the free on board (FOB) benchmark price currently sits at $78.33 a tonne, some $23 above the 2016/17 average forecast offered by the Australian treasury before this year’s federal budget.

With close to half the year now gone, the average FOB price for 2016/17 currently sits at around $57.50 a tonne.

Like the movement in the benchmark price, both lower and higher grade ores ripped higher to start the week.

And it was a similar factor underpinning the rally: strength in Chinese steel prices due to rumours that production levels will be curbed due to ongoing environmental checks by regulators, helping to lift iron ore prices as a consequence.

“Possible supply cuts as a result of an ongoing government crackdown on substandard steel was the hot topic during the weekend amid speculation that all induction furnaces in Tangshan would be shut down,” said analysts at Metal Bulletin.

“Gains in the futures market on Monday also gave a boost to spot prices, which led to trading activity rising in comparison with last Friday.”

The view expressed by Metal Bulletin was confirmed by analysts at The Steel Index who said “the surge in steel prices bolstered the on-shore futures, with DCE iron ore up 3.41% and SHFE rebar gaining 3.58%, in turn supporting seaborne ore purchases”.

While the relationship between steel and iron ore prices is now entrenched, one could easily argue that iron ore should be coming under pressure given production curbs means that less iron ore will be required without a lift in demand for steel products.

Let alone that Chinese iron ore port inventory levels continue to sit around highs not seen in two years.

Regardless whether that should be a consideration or not, both rebar and iron ore futures continued to rally in overnight trade, pointing to the possibility that spot markets may follow suit later in Tuesday’s session.

The May 2017 iron ore future on the Dalian Commodity Exchange closed trade at 641.5, up 1.1% for the session. Rebar futures traded separately on the Shanghai Futures Exchange rose by 0.81%, closing trade at 3,464 yuan.

Curiously, coking coal futures — something that supported iron ore prices as higher prices encouraged demand for higher grade iron ore — bucked the trend, slumping by 2.41%.

Trade in Chinese commodity futures will resume at Midday AEDT, just a hour before the release of key industrial output and urban fixed-asset investment figures from China for November.

These may be influential on movements in commodity futures in the second half of the session, particularly crude steel production levels found in the industrial output report along with residential construction starts and sales in the fixed asset investment figures.

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