The iron ore rally may be running out of puff

Niall Carson/PA Images via Getty Images
  • Iron ore spot markets traded mixed on Tuesday with modest movements recorded across the grades.
  • The price premium for higher grade ore compared to the benchmark narrowed to the lowest level since late May.
  • China will release manufacturing, non-manufacturing and steel industry PMIs for October today. In the past, these reports have often caused significant volatility in iron ore spot and futures markets.

The rally in iron ore spot markets took a breather on Tuesday with modest movements recorded across the grades.

However, with Chinese steel and bulk commodity futures falling heavily in overnight trade, it looks like spot markets will start off on a softer footing on Wednesday.

According to Metal Bulletin, the price of benchmark 62% fines rose 0.3% to $76.71 a tonne, leaving it at fresh multi-month highs.

It’s now rallied 10.8% since October 5.

In contrast to the performance of the benchmark, the price for lower and higher grade ore’s softened.

The price of 58% fine fell 0.4% to $46.01 a tonne, pulling back after hitting the highest level in 13-months on Monday.

The price of 65% Brazilian fines also dipped, falling 0.1% to $98.50 a tonne. It too hit a 13-month high on Monday.

Given the divergence across the grades during the session, it saw the price premium demanded for 65% fines over the benchmark narrow to the lowest level in five months.

“China’s preference for higher grade iron ore has declined from peaks in recent weeks, suggesting that steel mills are looking more closely at mid grade ores,” says Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank.

“That doesn’t mean that China’s preference for high grade ore is set to diminish structurally, but the economics of higher grade ore over mid grade ore remains an important consideration.”

Dhar says the recent price actions suggests “mills are more willing to use lower grade ore if the economics stack up”.

Recent declines in steel prices, helped in part by the prospect of less severe industrial output restrictions over winter in northern Chinese provinces, may explain the recent strength in mid and lower iron ore grades compared to more expensive and efficient grades.

The mixed performance from spot markets mirrored similar price action in Chinese futures which chopped around in early trade before eventually closing marginally higher.

Rebar futures in Shanghai finished at 4,172 yuan, up marginally from Monday’s night session close of 4,170 yuan.

Small gains were also seen in iron ore, coking coal and coke futures in Dalian compared to Monday’s night session close, finishing at 539, 1,394 and 2,402.5 yuan respectively.

While futures inched higher earlier in the day, those moves were reversed — and then some — in overnight trade on Tuesday.

Here’s the final scoreboard.

SHFE Rebar ¥4,130 , -1.17%
DCE Iron Ore ¥532.00 , -1.12%
DCE Coking Coal ¥1,384.50 , -0.93%
DCE Coke ¥2,382.00 , -0.58%

All contracts finished well off the highs seen during the day session, hinting that spot markets may follow suit on Wednesday.

Whether those moves hold, extend or reverse will likely come down to the release of official PMI reports from the Chinese government for October at midday AEDT.

In the past, the release of Chinese PMIs has often coincided with large movements in iron ore spot and futures markets.

Trade in Chinese commodity futures will resume at midday AEDT.

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