Iron ore has continued its gravity-defying move

Photo by Matt Stroshane/Getty Images

The rally in iron ore spot markets slowed sharply on Wednesday, bucking yet another surge in Chinese futures.

According to The Steel Index, the spot price for benchmark 62% fines rose by just 0.12% to $80.20 a tonne, a figure well below the 3% plus gain posted in Chinese iron ore futures.

To underscore the divergence between spot and futures markets — driven by renewed optimism over capacity reductions across China’s steel industry — the benchmark spot price has risen by 5.4% this week, less than half the gain seen in futures.

And they were up again overnight, seemingly taking its cues from another surge in rebar futures.

The most actively traded May 2017 contract on the Dalian Commodities Exchange added another lazy 2.2% to 610.5 yuan, taking its gain this week to 11.5%.

That mirrored a similar move in rebar futures on the Shanghai Futures Exchange which rose by 1.76% to 3,229 yuan.

While optimism over recently announced steel capacity reductions continues to buoy steel prices, despite the fact it was announced a year ago as part of a broader plan to reduce capacity by 100 to 150 million tonnes per annum, many continue to question why it’s leading to strength in iron ore prices.

At present, both appear to be moving in lockstep with each other, raising questions over the fundamentals driving the move.

Although reduced steel producing capacity has understandably boosted steel prices, the question remains whether that will signal a decline in steel output, hence iron ore demand, in the years ahead.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.