Iron ore is ripping higher as Chinese steel prices surge

Wang He/Getty Images

Iron ore continues to march higher, hitting the highest level in four months on Thursday on the back of another surge in steel prices.

According to Metal Bulletin, the spot price for benchmark 62% fines rose by 1.6% to $76.68 a tonne, leaving it sitting at highs not seen since April 6 this year.

In a little under two months it has now put on an extraordinary 43.7%.

Mirroring the strength in the benchmark price, both higher and lower grade ores surged during the session.

Ore with 65% Fe content outperformed, jumping 2.7% to $95.50 a tonne, while 58% fines added 1.9% to $51.05 a tonne.

The move followed continued strength in Chinese steel markets with rebar futures hitting a fresh four-year high on Thursday.

Analysts put the surge in rebar futures — seeing the January 2018 contract briefly surge above 4,000 yuan per tonne — down to a combination of strong demand, tight supply and concern that upcoming steel production cuts due to environmental factors could exacerbate supply shortages further.

“The order books are full at many mills through August so they are very aggressive in asking for high prices from customers,” Richard Lu, analyst at CRU consultancy in Beijing, told Reuters.

However, not everyone believes that fundamentals have been driving steel prices higher recently.

In a statement posted on its Wechat account on Thursday, China’s Iron and Steel Association (CISA) said the recent surge in rebar futures was due to “speculative” behaviour and not “driven by market demand or reduced market supply”.

CISA said that some traders were “over-interpreting, or even misreading” the effect China’s environmental policies in the second half of 2017, using it as an excuse to drive up prices for their own gain.

Last week the Chinese government called on steel producers in four northern provinces, including the steel-hub of Hebei, to halve output levels from late November to late February in an attempt to improve air quality.

The strongly-worded post followed a meeting on Thursday between the Ministry of Industry and Information Technology (MIIT), China Securities Regulatory Commission (CSRC), CISA, and the Shanghai Futures Exchange (SHFE) to discuss recent strength in steel prices.

The January 2018 rebar futures contract on the Shanghai Futures Exchange has rallied 50% since early June.

While speculative buying in futures has no doubt contributed to the size of that move, Chinese rebar inventories currently sit near the lowest levels since November last year despite Chinese crude steel output rising to the highest level on record in June.

Demand is strong and supply is short, and significant supply cuts are coming.

The jawboning from policymakers suggests they are becoming concerned that higher steel prices may start to impact the nation’s construction sector, an undesirable outcome for the government ahead of elections later in the year.

Despite the threat of new measures to curb speculative activity in futures markets, traders seemingly couldn’t care less overnight, continuing to buy rebar, iron ore and coking coal futures on even the smallest of dips.

Here’s the final scoreboard from the overnight session.

SHFE Rebar ¥3,989 , 0.50%
DCE Iron Ore ¥567.00 , 0.80%
DCE Coking Coal ¥1,363.00 , 2.40%
DCE Coke ¥2,210.00 , 3.08%

Both rebar and iron ore futures finished just off the highs struck during Thursday’s day session.

Trade in Chinese commodity futures will resume at 11am AEST.

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