Iron ore has gone berserk, rallying 9% in 3 days

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Forget the trials and tribulations of crude oil – the rally in iron ore is quickly becoming the commodity story of 2016 with the price rocketing to a fresh 4-month high on Wednesday.

According to Metal Bulletin, the spot price for benchmark 62% fines rose by a further 2.06%, or $1.06, to $52.50 a tonne.

It is now trading at the highest level seen since October 21 last year, with the price up 8.8% in the past three sessions alone.

Optimism over strength in steel prices, and as a consequence increased margins and profitability for steel mills, was said to have contributed to the ongoing surge.

As the chart shows below, the rally since mid-December last year has been nothing short of breathtaking, climbing 37.1% over the past 54 trading sessions.

Year to date it has climbed 20.5%, and there’s signs there may be further gains to come yet.

The most actively traded May 2016 iron ore futures contract on the Dalian Commodities Exchange rose by a further 1.18% to 386 yuan, suggesting that the gain in the benchmark spot price may continue into a fourth consecutive session.

Chinese rebar futures, often cited as a lead indicator for movements in iron ore, were down slightly, suggesting the factors underpinning the rally may be weakening.

Regardless, the spot price is delivering an unexpected boon to the federal government’s coffers at present, along with those investors who have bought into the beaten down mining sector.

The big question now is whether the recent rally will continue, stabilise or reverse. Macquarie reckons the price will remain sticky at around $50 a tonne, a more optimistic view than many other forecasters in the market.

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