Iron ore spot markets continued to rip higher on Monday, taking cues from yet another gravity-defying surge in Chinese futures.
And the benchmark price is now back above $90 for the first time in years.
According to Metal Bulletin, the price for benchmark 62% fines soared by another 6.5% to $92.23 a tonne, leaving it sitting at the highest level since August 20, 2014.
Over the past five sessions it’s gained 14.4%, extending its rally in 2017 to 16.9%.
And, from the record low of $38.30 a tonne struck in mid-December 2015, the price has now risen by an enormous 141%.
It’s become increasingly hard to find superlatives to describe the exuberant price action, given the scale and duration of the rally.
The main factor underpinning it remains the same: bullish sentiment towards the outlook for Chinese steel demand.
“Mills’ booking orders are quite good and they’re trying to produce as much as possible,” an unnamed iron ore trader in Shanghai told Reuters on Monday. “People are expecting demand in the spring will be strong.”
As a result of that optimism, seemingly a never-ending force over the past year, traders reported that steel mills were replenishing stocks of iron ore after the Lunar New Year holiday in early February, perhaps explaining the strength in Chinese futures on Monday.
Analysts at Metal Bulletin said steel prices were also supported by rumours that policymakers will announce further production cuts in the weeks ahead.
“Billet prices experienced a sharp increase amid active trading and rumored production cuts from late February onwards ahead of China’s biggest political events of the year — the meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference scheduled for March 3-5,” the group wrote.
The most actively traded May 2017 iron ore future on the Dalian Commodities Exchange closed Monday’s day session with a gain of 6.74%, leaving it up 20% from the lows struck on February 7.
That was no doubt assisted by continued strength in rebar futures traded seperately on the Shanghai Futures Exchange. They soared 4.4% to 3,437 yuan, helping to propel gains in other industrial metals and bulk commodity futures during the session.
And, as the daily chart of Dalian iron ore futures shows below, technical buying following a clear break above the highs struck in January may have exacerbated the gains that have been seen in recent days.
If you needed proof that speculative forces have taken hold in iron ore futures, this adds to a growing list.
Buying iron ore on a technical break higher – it’s unlikely that would have been a factor to consider when price contracts were set on an annual basis only a decade ago.
Others suggested that renewed strength in the US dollar may have also supported futures, helping to boost demand as traders rushed to protect against potential further weakness in the Chinese yuan.
While Chinese futures are priced in yuan, iron ore is commonly traded in US dollars in global markets.
Whatever the reason behind the rally, be it fundamentals, technicals or outright speculation — or a combination of all three — it certainly helped to propel Australian mining stocks higher on Monday.
Rio Tinto was up 3.5% to $68.32 and BHP 2.2% to $26.45. And, making those gains look small, pure play iron ore miner Fortescue Metals saw its share price surge 6% to $6.88.
Whether that momentum can be sustained on Tuesday will almost certainly be determined by the performance of Chinese futures when they reopen at midday AEDT.
In overnight trade they gave back some of Monday’s day session gains, hinting that the bullish momentum seen in recent sessions may be beginning to ebb.
The May 2017 iron ore future finished up 1.5% at 710.5 yuan, below Monday’s day session close. It was a similar story for rebar, coking coal and coke futures which all gave back ground during the session.
The release of Chinese producer price inflation figures for January at 12.30am AEDT may also be influential on the performance of commodity futures later in the session.