When it comes to volatility in markets, nothing can top the moves being seen in iron ore prices right now.
Be it spot or futures markets, seemingly, it’s nothing but a speculative frenzy. Just have a look at the recent price action as evidence.
Following the lead provided by Dalian iron ore futures which closed up 6%, the spot price for benchmark 62% fines jumped by an equally remarkable 6.5% to $74.90 on Tuesday, more than reversing the decline seen in the previous two sessions.
It has now gained 71.2% year to date.
The benchmark price has now moved more than 1% in either direction in 11 of the past 12 sessions. In 8 of those sessions, the price movement has been more than 2.5%.
Australia’s largest goods export by dollar value is now nothing more than a plaything for Chinese commodity traders.
As for the reason behind the enormous rally, as usual, there’s plenty of factors being cited but none that can definitively explain just what’s going on.
Analysts at Metal Bulletin suggested that iron ore rallied on strength in Chinese steel prices following the announcement of further production curbs in the major steel producing city of Tangshan in Northern China.
“The city has imposed restrictions on the production of coke, iron and steel in a bid to improve air quality in the region,” the group said on Tuesday.
“The restrictions are in place for four months, from November 15 till March 15.
“News of steel and coke production restrictions in Tangshan gave ferrous futures an upward push, sending the rebar contract to its daily limit of 2,900 yuan ($421) per tonne,” it said.
These curbs have been implemented on several occasions already this year, and each time it’s led to a surge in speculative buying in Chinese futures markets.
So the price action on Tuesday seems to be a replication of what has been seen in the past, despite some questioning just what impact it will have on steel production in the country.
However, analysts at The Steel Index put the move down to a bullish analyst report on the outlook for commodity prices, including iron ore.
“A bullish report by an investment bank, forecasting a surge in commodity markets, spread in the market today and attracted capital in China’s commodities futures contracts with the most active SHFE rebar and DCE iron ore contracts traded up to their upper limit,” it said.
Presumably the “investment bank” being referred to is Goldman Sachs who upgraded its 3, 6 and 12-month iron ore price forecasts to $65, $63 and $55 a tonne earlier this week.
“Steel consumption is more resilient than expected and demand for iron ore is likely to be supported further by incremental restocking across the steel supply chain,” said Goldman. “Further, the pace of supply growth has slowed as a result of delayed capital expenditure and operational challenges.”
Whichever is correct: be it the curbs in Tangshan, Goldies bullish report or a combination of both, or even other factors, it’s clear that the market moves are being driven entirely by swirling levels of speculation in futures markets.
And it’s only getting crazier given the moves seen overnight.
The January 2017 iron ore future surged by a jaw-dropping 8.83%, closing the session at 616 yuan. It can only rise my a maximum amount of 9% during the overnight session.
Last week this contract nearly entered a technical bear market — defined as decline of 20% — and now it’s well on the way to reentering a bull market, rallying 15.6% from the lows of Monday.
Rebar, coke and coking coal futures also jumped overnight, recording gains of between 1.54% to 3.86%.
All massive moves, particularly following enormous gains on Tuesday.
Trade in Chinese commodity futures will resume at Midday AEDT.
Business Insider Emails & Alerts
Site highlights each day to your inbox.