Iron ore logged its largest gain in eight months on Monday, rocketing higher following another surge in Chinese futures earlier in the session.
According to Metal Bulletin, the spot price for benchmark 62% fines surged by 7.23% to $73.70 a tonne, leaving it sitting at the highest level since April 11.
It was the largest one-day percentage increase since December 1, 2016, and extended the rally in the benchmark from June 13 to an impressive 38.1%.
Both higher and lower grades also recorded solid gains although they were not to the same scale seen in the benchmark.
The move in spot markets followed another gravity-defying rally in Chinese iron ore futures earlier in the session.
SHFE Rebar ¥3,733 , 4.71%
DCE Iron Ore ¥570.50 , 7.95%
DCE Coking Coal ¥1,344.00 , 5.70%
DCE Coke ¥2,064.00 , 5.85%
The most actively traded September 2017 contract closed up limit-up 8% at 570.5 yuan per tonne, leaving it at the highest level since April 6 this year.
Market rules prevent an increase in excess of 8% in any day, so nobody can say where it may have finished the session.
Rebar, coke and coking coal futures also soared, adding more than 4.5% apiece.
The latest buying binge followed the release of China’s steel industry purchasing manager’s index (PMI) which rose to 54.9 from 54.1 in June.
This PMI measures changes in activity levels across China’s steel industry from one month to the next. Anything above 50 signals activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.
So not only did activity levels improve in July, they did so at a faster pace than June.
Adding to the bullish headline figure, the report’s new orders subindex — a lead indicator on activity levels looking ahead — jumped to 63.1, up from 58.4 in July. The subindex measuring inventory levels of finished steel product also pointed to robust demand, rising fractionally to 41.6 from 40.9 previously.
Demand is strong and supply is short, providing ideal conditions for Chinese steel mills to increase steel production. And to do that they will require more iron ore and coking coal, helping to explain the scale of the moves seen on Monday.
Along with the bullish report card on Chinese steel demand, speculation that environmental inspections by Chinese regulators could reduce steel production may have also contributed the strength in futures today.
“Environmental inspections have caused great impact on iron ore prices. Production in some mines, processing plants and mills are being disrupted,” an unnamed iron ore trader in Beijing told Reuters. “The whole supply chain has been affected by the inspections.”
In the past speculation over possible production cuts — whether due to environmental concerns or overcapacity across China’s steel and mining sectors — has often lead to substantial gains futures akin to those seen today.