Iron ore's enormous rally has been upgraded from 'amazing' to 'gangbusters'

Photo by NASA via Getty Images

We’re quickly running out of superlatives to describe the enormous rally underway in iron ore markets.

We’ll go with “gangbusters” for today.

The spot price for benchmark 62% surged by another 4.42% to $74.12 a tonne on Thursday, according to Metal Bulletin, the largest one-day percentage gain since October 25.

Not since November 17, 2014 has it been at this level.

The rally followed a surge in Chinese iron ore futures earlier in the session which finished Thursday trade limit up 8.99%.

The only thing preventing further gains was that they were not permitted by regulators. It’s just that kind of market right now.

Demand for higher grade ore in the wake of surging coking coal prices has been one reason used to explain the enormous rally in recent days.

Speculation in futures trade also seems to be playing a roll. The gains in iron ore futures over the past two days followed a decision by the Dalian Exchange to increase trading margins on coking coal futures on Tuesday.

That may have diverted some hot money from coking coal futures to iron ore — certainly the timing and price action of recent days says it has.

“China‚Äôs futures markets have seen a surge in trading activity, particularly in coal markets, compelling local commodity exchanges to raise trading charges this week,” said Viveh Dhar, a mining and energy commodities analyst at the Commonwealth Bank.

“As a result, funds have been diverted to iron ore futures, helping explain the recent jump in iron ore prices.”

Recent weakness in the Chinese yuan may also be a factor with analysts at Goldman Sachs suggesting that 60% of the rally in October was driven by weakness in the currency.

On Thursday the yuan fell to the lowest level against the US dollar since 2010, a six-year low.

It would be interesting to see what would happen if authorities in Dalian were to increase margins for iron ore futures. It would certainly provide a test of the fundamentals the rally is being underpinned by.

Regardless if it’s been driven by fundamentals, speculation or a combination of both, the scale of the rally is amazing no matter how you measure it, particularly with port inventories in China currently sitting at the highest levels seen in two years.

Over the past month it has gained 33%. Year to date it has surged over 70%. From the lows seen in mid-December last year, the gain is nearly 95%.

And it looks like those enormous gains are going to get even larger, at least based off a continued rally in futures markets.

The January 2017 iron ore contract in Dalian closed overnight trade at 595.5 yuan, up another lazy 2.67% for the session.

That’s the highest this particular contract has traded at since September 30, 2014. It’s rallied 65% since June 17.

It also came despite weakness in other bulk commodities with coke, coking coal and rebar futures all finishing lower for the session.

Trade in Chinese futures will resume at Midday AEDT.

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