Iron ore looks like it's heading towards another multi-month peak

Quinn Rooney/Getty Images

Last week it looked like the stellar rally in the the iron ore price had come to an end.

Having surged by 35% from its all-time low of $38.30 a tonne stuck on December 11, the benchmark spot price fell nearly 6.5% over just two days, leading many to suggest that further declines would follow.

Not yet, it seems.

Following a near three per cent rally on Monday, Metal Bulletin’s ion ore index (MBIOI-62) rose by a further 3.67%, or $1.82, to $51.44 a tonne on Tuesday, taking the benchmark price back to within touching distance of the multi-month peak of $51.64 a tonne set on February 25.

As the chart below shows, the price action over the past four sessions has been nothing short of amazing.

According to Metal Bulletin, the sudden and spectacular rebound corresponds with renewed monetary policy easing from the People’s Bank of China (PBOC), signs that activity in China’s steel sector is stabilising and expectations that steel production may increase in the period ahead.

“CISA [China Iron and Steel Association] have announced that member mills produced crude steel at an average rate of 1.56 million tonnes per day over the second ten days of this month, almost unchanged from the preceding period,” said Metal Bulletin. “However, given the post-holiday rise in spot prices and the approach of the traditional peak season, output levels are expected to increase in March, market sources said.”

Adding to optimism of an improvement in operating conditions, China’s steel purchasing managers’ index (PMI) rose to 49.0 in February, leaving the index at the highest level seen since May 2014. While the gauge remains below 50, signalling activity continues to contract, the sharp improvement seen in recent months, along with a surprise expansion in new orders, has provided optimism over the near-term outlook for the sector.

In unison with the PBOC’s decision to cut its reserve requirement ratio for banks by 0.5% to 17.0%, freeing up cash to be used in the broader Chinese economy, the three factors have proven to be a potent mix for the iron ore price.

Hinting that the rally in the spot price may continue on Wednesday, potentially leaving it a fresh multi-month peaks, Chinese iron ore and rebar futures continued push higher in overnight trade.

The most actively traded May 2016 iron ore contract on the Dalian Commodities Exchange rose by a further 1.33% to 380 yuan, outpacing a 0.71% gain in May 2016 rebar futures on the Shanghai Futures Exchange.

Both markets will resume trade at 12pm AEDT today.

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