Iron ore has hit a 26-month high and it looks like the rally isn't finished yet

Photo: Getty Images

Iron ore has climbed above the $80 for the first time since October 2014.

According to Metal Bulletin, the spot price for benchmark 62% fines rose by a further 1.53% to $80.83 a tonne, taking its gain over the last week to 15%.

In 2016 it’s now added 85.5%, and is up 111% from the record-low level of $38.30 a tonne level struck in early December last year.

Lower grade ore outperformed benchmark ore with the spot price for 58% fines jumping by 3.2% to $60.99 a tonne on Monday. Higher grade ore has been in demand recently due to strength in coking coal prices.

And it looks like the rally isn’t done yet.

Dalian futures were up again overnight, extending the gain from the lows of November 21 to 30%.

That’s 30% in just five days.

Rebar futures also ripped higher, closing up 1.92% at 3,344 on the Shanghai Futures Exchange.

As for the reason behind the ongoing rally in futures, as usual, there have been plenty of reasons being cited, but none that definitively explains just what’s going on.

Analysts at Metal Bulletin said the gains were fuelled by a State Council investigation into an increase in steel production by some steel mills in the Chinese provinces of Hebei and Jiangsu.

According to Xinhua, citing a statement from the State Council, investigation teams will be dispatched to Hebei and Jiangsu, where capacity cut rules were breached, as part of efforts to intensify supervision.

Metal Bulletin said that after initial investigations, “serious action” was being taken against mills that had ramped up their capacity without official approval, leading to sharp gains in rebar futures. That, in turn, supported coking coal and iron ore futures.

Analysts at The Steel Index took a slightly different view, suggesting that “further progress in China’s mission to trim surplus steel capacity, coupled with expectations of more robust demand for finished products in 2017, further bolstered buoyant ferrous market sentiment” on Monday.

So production cuts again, albeit for different reasons.

Safe to say, after surging relentlessly over the past week, speculative momentum-based buying has also been a major factor behind the rally.

Here’s how bulk and base commodity futures in China performed overnight on Monday. Trade in these contracts will resume at Midday AEDT.

  • SHFE Copper ¥48,680 , -1.02%
  • SHFE Aluminium ¥13,730 , -1.61%
  • SHFE Zinc ¥24,075 , 0.69%
  • SHFE Nickel ¥97,230 , -0.37%
  • SHFE Rebar ¥3,344 , 1.92%
  • DCE Iron Ore ¥623.50 , 1.30%
  • DCE Coking Coal ¥1,448.50 , -2.03%
  • DCE Coke ¥2,016.50 , 0.15%

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.