Iron ore prices surge after Golden Week in China, but that doesn't guarantee the rally will continue

Photo by Massimo Bettiol/Getty Images

Iron ore spot markets spluttered back to life on Monday, corresponding with the end of the week-long Golden Week holiday in China.

As was the case in 2014 and 2015, the first move post Golden Week celebrations was to the upside.

According to Metal Bulletin, the spot price for benchmark 62% fines increased by 1.41% to $56.65 a tonne. It largely reversed the 1.45% drop seen on September 30 — the last trading date before Golden Week began — and left the year to date gain bang on 30%.

Despite the outsized move in the benchmark price, analysts at Metal Bulletin said it was “a relatively quiet day” in terms of market activity.

Suggesting that the move in spot markets may continue today, Chinese iron ore futures surged higher in overnight trade, tracking similar gains in rebar and coking coal prices.

The most actively traded January 2017 iron ore futures contract closed at 416.5 yuan, up 2.97% for the session.

Rebar and coking coal futures also added 2.8% and 1.72% respectively, suggesting the move was linked to sentiment towards the steel market.

While spot and futures markets are looking decidedly bullish, this kind of surge after Golden Week has been seen before. Perhaps of more importance, in the past two years, the initial surge has not only reversed but heralded the start of a prolonged slump in prices.

After initially jumping close to 6% following Golden Week in 2014, the benchmark spot price subsequently slumped by more than 15% into year-end.

A year later, after popping more than 6% in the three days following the holiday, the price tumbled close to 24% over the remainder of the year, briefly hitting the lowest level on record in the process.

While this is only history, and may have been driven by unique circumstances at the time, given continued efforts from Chinese policymakers to cool housing activity in some of the nation’s largest cities, it’s a safe bet that many will be watching the price action carefully in the days ahead, particularly as this is traditionally a slower period for construction activity in China.

Trade in Chinese commodity futures will resume at midday AEDT. Spot pricing from Metal Bulletin will be released after 9.30pm AEDT.

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