Iron ore bounces but there's signs it may not last

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  • Iron ore spot markets bounced on Tuesday, led by strength in lower grades.
  • The move was assisted by stronger Chinese steel prices, following easing concerns about a global trade war and the outlook for Chinese steel demand.
  • Chinese iron ore and coking coal contracts both reversed earlier gains in overnight trade.

Iron ore spot markets bounced on Tuesday after several days of heavy losses, assisted by a recovery in Chinese steel prices during the session.

However, with Chinese futures down in overnight trade, the early indications suggest the bounce is unlikely to extend into Wednesday.

According to Metal Bulletin, the spot price for benchmark 62% fines rose 1.3% to $65.17 a tonne, logging only its fifth gain in the past 21 sessions.

It was the largest percentage gain in two weeks, trimming its loss from March 1 to 17.9%.

Strong gains were also seen across lower and higher grades on Tuesday, especially in the former.

58% fines jumped 2.8% to $37.44 a tonne while ore with 65% Fe content added a smaller 0.9% to settle at $81 a tonne.

Despite the outperformance of lower grades on the day, Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank, does not expect its price discount will narrow by any significant margin in the months ahead.

“While we expect that premium [for mid and higher grades] to pull back slightly from current levels, we believe the broad preference for higher grade ores is a structural change in the market,” he says. “China is looking to ensure cleaner air, which is consistent with the priorities of the Xi administration.”

The solid rally across spot markets followed a modest bounce in Chinese steel and iron ore futures on Tuesday.

Rebar futures in Shanghai finished the session at 3,433 yuan a tonne, continuing to recover after falling to a eight-month low earlier in the week.

That move helped to underpin gains in iron ore futures in Dalian which closed at 444 yuan a tonne, up from Monday’s night session close of 440 yuan a tonne.

Coking coal and coke contracts also bounced, finishing trade at 1,251.5 yuan and 1,841 yuan a tonne respectively.

Analysts put the recovery down to a perceived reduction in fears of a looming trade war erupting between China and the US, along with improved sentiment towards the outlook for Chinese steel demand during the Spring construction season.

“The worst moment brought by fears of the trade war may have ended and the market is re-establishing confidence,” Xu Bo, analyst at Haitong Futures., told Reuters.

“[The} price recovery is also being buoyed by expectations of increasing demand at downstream users and improving utilisation rates at steel mills.”

According to data from Mysteel consultancy, utilisation rates at Chinese steel mill blast furnaces rose by 1.1 percentage points to 63.12% last week, moving back to the levels seen before China’s National People’s Congress earlier this month.

However, providing an early indication that the recovery in spot and futures markets may not last, Chinese steel and bulk commodity futures all eased in overnight trade.

Here’s the scoreboard.

SHFE Rebar ¥3,429 , 0.47%
DCE Iron Ore ¥435.50 , -1.80%
DCE Coking Coal ¥1,238.00 , -1.20%
DCE Coke ¥1,800.00 , -2.68%

All contracts finished below Tuesday’s day session close with the steepest losses seen in iron ore and coal contracts.

While movements in overnight trade have not been the most reliable indicator of those in spot markets of late, the reversal suggests the selling pressure that has dominated the month of March may not be over yet.

Trade in Chinese commodity futures will resume at midday AEDT.

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