Iron ore is ripping higher as China clamps down on steel production

Photo by Yuli Seperi/Getty Images

Iron ore spot markets made it five gains on the trot on Monday, leaving the benchmark price at a fresh multi-month high.

And with Chinese iron ore futures screeching higher in overnight trade, it looks like there may be further gains to come.

According to Metal Bulletin, the price for benchmark 62% fines rose 1.2% to $77.74 a tonne, leaving it at the highest level since September 5, 2017.

It’s made a perfect start to 2018, adding an impressive 7.1%.

The strength in the benchmark was mirrored across the grades, albeit to a lesser margin.

The price for 58% fines added 0.6% to $42.58 a tonne. Ore with 65% Fe content rose by a smaller 0.2%, settling at 92.80 a tonne.

As is often the case, the strength in futures coincided with a late rally in Chinese rebar and iron ore futures on Monday.

The May 2018 rebar contract in Shanghai rose 0.7% to 3,818 yuan a tonne, recovering from losses seen earlier in the session. It was a similar story for iron ore futures in Dalian with the May 2018 contract rallying 3.0% to 555.5 yuan a tonne, leaving it at the highest level since early September last year.

The gains followed the release of new guidelines from Chinese regulators restricting the replacement of obsolete steel mill capacity.

According to Reuters, China’s Industry and Information Technology Ministry said it would allow one tonne of new capacity to be built for each 1.25 tonnes closed in key regions in the period ahead, an outcome that acted to support steel prices in the later parts of the session.

“The statement raised market expectations that China will act to restrict new steel production capacity to be built,” an unnamed steel trader in Shanghai told Reuters.

As seen in the 1-minute chart below, the news of the replacement curbs struck late during Monday’s session, pushing rebar and iron ore futures sharply higher. Iron ore is shown in white, rebar in blue.

Source: Thomson Reuters

And, as shown in both the chart and scoreboard below, those gains were consolidated upon during Monday’s night session.

SHFE Rebar ¥3,825 , 1.41%
DCE Iron Ore ¥557.50 , 2.95%
DCE Coking Coal ¥1,382.50 , 1.51%
DCE Coke ¥2,077.00 , 0.78%

The late rally in futures on Monday, along with further gains overnight, points to the likelihood that spot markets may follow suit today.

Much will be determined by the performance of futures during Tuesday’s day session.

Trade will resume in all commodity contracts at midday AEDT.

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