Iron ore has gone bananas, surging over 6%

Photo by Scott Campbell/Redferns via Getty Images

Iron ore ripped higher on Monday, logging its largest one-day increase in over two months.

According to Metal Bulletin, the spot price for benchmark 62% fines surged by 6.42% to $53.86 a tonne, leaving the price at the highest level seen since May 20.

It took the increase from June 2 to 11.8%, extending this year’s gain to 23.6%.

The significant gain followed a surge in Chinese iron ore futures on Monday which finished trade “limit up” 6%.

And it looks like there’s going to be further significant increases in the spot price on Tuesday, at least based off the bullish price action in futures overnight.

The most actively traded September 2016 contract on the Dalian Commodities Exchange rose by a further 3.74%. At 416.5 yuan, it now stands at the highest level since May 12.

So what is driving the enormous gains in both spot and futures markets? Speculation over supply-side reform and restructuring of China’s industrial sectors, following announcements made over the weekend.

On Sunday, China’s top economic planner announced that the government was aiming to cut 45 million tonnes of Chinese steel capacity this year, along with a further 280 million tonnes of coal production.

That followed a similar announcement in February in which it stated that it would shutter 100-150 million tonnes of steel capacity and 500 million tonnes of coal production in the five years to 2020.

While iron ore wasn’t specifically mentioned for production curbs, it clearly didn’t prevent investors from speculating via the futures market.

News that Baosteel and Wuhan Iron and Steel, the second and sixth-largest Chinese steel producers, were looking to restructure operations further boosted sentiment across China’s steel industry, propelling not only iron ore but also coking coal and rebar futures to enormous gains.

“This gives people hope that the industry will be better going forward as the government undertakes supply-side reforms,” Wang Di, analyst at CRU consultancy in Beijing, told Reuters. “Profits of steelmakers will be more sustainable.”

While providing hope to some of supply-side reform, many, including those sceptical over the government’s pledge to enact meaningful reforms, will be watching developments in the sector closely in the months ahead.

Similar remarks on supply-side reform announced earlier this year, coinciding with a huge acceleration in infrastructure and residential construction investment, saw prices for steel and raw materials prices surge higher in response.

The gains were that significant that many previously uneconomic firms restarted production as a consequence, exacerbating supply gluts rather than helping to address them.

Clearly not a sustainable outcome that the government can allow to persist.

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