Iron ore goes berserk, soaring to a 2-year high

Pablo Blazquez Dominguez / Getty Images

Iron ore spot markets surged higher on Monday — mirroring another huge rally in Chinese futures and sending prices to the highest level seen in two years.

According to Metal Bulletin, the spot price for benchmark 62% fines jumped by 3.9% to $83.65 a tonne, leaving it at the highest level seen since October 14, 2014.

It’s now added 6% this year, following a gain of 81% in 2016.

From the record low spot price of $38.30 a tonne on December 11, 2015, the benchmark price has now surged by 118%.

Both lower and higher grade ores also rallied during the session, mirroring the bullish price action in the benchmark price.

Analysts at Metal Bulletin note that the sharp increase followed another rally in Chinese steel prices on Monday.

“China‚Äôs spot rebar prices bounced back on Monday January 16 amid news of production cuts in Hebei province due to air pollution,” the group wrote on Monday.

“Cities in Hebei are required to cut emissions by 30-50%, with the province raising another alert for air pollution last Friday just days after a similar one was lifted in the region.”

That news also ignited a rally in rebar futures on the Shanghai Futures Exchange, seemingly dragging iron ore, coke and coking coal futures along for the ride.

Metal Bulletin noted that some steel stockists were building inventory levels on expectations of higher prices.

While news of production cuts has contributed to strength in spot, physical and futures prices for steel, seemingly on the belief that reduced supply will lead to higher prices, as many analysts have pointed out, Chinese iron ore port inventories currently sit at the highest levels seen in over over a decade, according to data from SteelHome, rising to 118.15 million tonnes last week.

This suggests that supply constraints in iron ore markets aren’t anywhere near as acute as those seen in steel and coal markets.

However, as has been the case for some time now, where steel prices move, those for iron ore tend to follow, with market participants seemingly discounting the threat that capacity cuts from steel producers may lead to weaker demand for iron ore.

Some suggest that speculative forces in Chinese futures — responsible for periods of acute price gains in spot and physical markets during 2016 — have taken hold once again, seeing fundamentals pushed to the side for the moment.

“There has been an improvement in sentiment since last week and I think there are more speculative” forces at play, Wang Di, an analyst at CRU consultancy in Beijing, told Reuters.

Another Singapore-based trader described the moves as “crazy”, suggesting that there was no reason to explain the move in futures given “poor” iron ore fundamentals that should be capping gains.

After such an enormous gain on Monday — something that briefly saw futures rally as much as 8% — the bullish momentum in iron ore futures ebbed a touch overnight, hinting that further price gains in spot and physical markets may be harder to come by on Tuesday.

The most actively traded May 2017 contract on the Dalian Commodities Exchange rose 3.3% to 657.5 yuan — the same level it hit during Monday’s day session — having traded up to 663.5 yuan earlier in the session.

Gains of 1.69%, 0.73% and 0.9% were also recorded in Chinese rebar, coking coal and coke futures — again punchy, but well short of the lofty levels of Monday.

Trade in Chinese commodity futures will resume at Midday AEDT. Given the wild price action seen in recent days, there’s likely to be plenty of interest.

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