Iron ore explodes higher, recording its largest gain of 2018

Scott Barbour/Getty Images
  • Iron ore just recorded its largest gain so far in 2018.
  • Surging crude oil prices and demand hopes were cited as catalysts behind the move.
  • Futures weakened in overnight trade, hinting that the sudden bout of buying enthusiasm might not last.

Iron ore just logged its biggest gain of 2018.

But the early signs suggest the parabolic-like move won’t last.

According to Metal Bulletin, the spot price for benchmark 62% fines surged 3.9% to $68.45 a tonne, leaving it at the highest level in over a month.

In percentage terms, the gain was the largest since December 22 last year, extending its rally over the past three days to 7.1%.

The chart below shows the speed and scale of the recent surge, mirroring similar episodes following periods of weakness in the past.

The performance of the benchmark was replicated across the board, especially in lower grades.

58% fines surged 4.7% to $40.42 a tonne. 65% fines was the relative underachiever, only rising 3.1% to $86.50 a tonne.

Clearly, the bulls were firmly in charge on Thursday.

The strength in spot markets followed an even larger jump in Chinese iron ore futures during Wednesday’s night session, a move that extended into Thursday’s day session.

The September 2018 contract in Dalian surged 6.5% to 475 yuan a tonne, finishing well above Wednesday night’s close of 465 yuan a tonne.

Helping to underpin that gain, rebar futures traded separately in Shanghai jumped 2% to 3,516 yuan a tonne, adding to the substantial gains seen in recent days.

The sudden bout of enthusiasm towards iron ore, in stark contrast to the view seen over much of 2018, was driven by surging crude oil prices — a major mining sector input cost — along with speculation that Chinese steel demand will increase following a reduction in the reserve ratio requirement (RRR) for some Chinese lenders announced earlier in the week.

“What our central bank did will give some support to real estate projects, so there should be support for steel demand in the short to medium term,” an unnamed Shanghai-based iron ore trader told Reuters.

However, he suggested that narrative may have encouraged short-term speculators back to the market, particularly after steep falls in recent months.

“This could be short-lived because we may also be seeing some speculative money,” he said.

And we may already be seeing some evidence of that already with rebar and iron ore futures both softening in overnight trade, mirroring the broader performance of commodity markets on Thursday.

Here’s the final scoreboard from Thursday’s night session.

SHFE Rebar ¥3,488 , -0.14%
DCE Iron Ore ¥470.50 , 1.07%

The modest reversal points to the likelihood that spot markets may follow suit today, at least in early trades.

All commodity futures contracts will resume trade at 11am AEST.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.