Iron ore is going nuts, again

Photo by Kevork Djansezian/Getty Images

The wild gyrations in the iron ore market continued on Monday — this time to the upside — leaving the benchmark spot price at a fresh seven-week high.

According to Metal Bulletin, the price for 62% fines jumped by 3.48% to $56.22 a tonne, leaving it at the highest level seen since May 18 this year.

From June 24 the price has surged by 11.1%, extending its 2016 gain to 29%.

So what’s actually driving the bullish price action? The honest answer is that there’s no definitive answer, at least on the surface.

Analysts at Metal Bulletin suggest that it is being driven by strength in Chinese steel prices, powered by rumours of a proposed government shutdown in the key Chinese steelmaking hub of Tangshan ahead of a “key event”.

“Strength has also been seen in the steel market, China’s spot rebar prices continued to rise on Monday amid surging futures, though a volatile billet market is keeping participants cautious,” said Metal Bulletin.

“Rumour emerged over the past weekend that steel mills in Tangshan would be required to halt production sometime soon ahead of another key event.”

If the rumours turn out to be true, it would not be the first time that steel prices, and as a consequence its key inputs, have been impacted by curbs on steel production.

Earlier this year the government ordered mills and factories surrounding Tangshan to curb emissions ahead and during a landmark horticultural exposition currently underway in the city. A similar scenario also occurred last year when industry was ordered to cease or slow output ahead of a military parade to celebrate the end of World War 2.

Outside of rumours and innuendo, analysts at The Steel Index suggest the strength in steel prices followed the release of data last Friday that revealed China’s steel inventories remain close to lows not seen since 2009 at present.

Whatever the answer, Chinese iron ore traders have latched onto the bullish price action, driving futures even higher in overnight trade.

The most actively traded September 2016 contract on the Dalian Commodities Exchange jumped by a further 2.2% to 441 yuan, leaving it at the highest level seen since May 9 this year.

The gains in iron ore futures came despite weakness in coking coal and rebar futures over the same period.

This is perhaps explained by news released overnight that Rio Tinto has shelved plans to its $20 billion Simandou iron ore project in Guinea because of a “sustained slump in prices”.

Simandou would have comprised an iron ore mine in central Guinea, a 650-kilometre (404-mile) railway and a deepwater port on the West African country’s Atlantic Coast, according to Reuters.

Trade in Chinese futures will resume at 11am AEST.

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