Iron ore's latest slide looks like it's already over

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Iron ore spot markets fell heavily on Wednesday, especially for lower grades, although it already looks like the weakness won’t last.

Futures, after two days of heavy selling, are rallying again.

According to Metal Bulletin, the spot price for benchmark 62% fines fell by 2.3% to $77.82 a tonne, it’s largest one-day percentage decline in over a month.

Lower grades were hit even harder than the benchmark with the price for 58% fines plunging 7.8% to $49.49 a tonne, all but wiping out the gains achieved over the past few sessions.

In comparison, higher grades outperformed. Ore with 65% Fe content lost 2%, closing the session $100.50 a tonne.

“High-grade iron ore is in big demand because all mills are trying to increase productivity. But for medium to low-grade iron ore, there’s basically no demand,” a trader in Shanghai told Reuters.

The weakness in spot markets followed a sharp drop in Chinese iron ore and rebar futures on Wednesday, continuing the rout that began on Tuesday evening following the release of another warning from the China Iron and Steel Association (CISA) to speculators that further gains in steel prices were unlikely.

“Weak futures, coupled with a drop in the price of billet late on Tuesday, brought bearish sentiment to the spot market,” said Metal Bulletin in relation to the spot rebar market. “Traders competed with one another by lowering their prices to secure sales, but most buyers shied away.”

The January 2018 iron ore contract on the Dalian Commodities Exchange dropped 3.82%, closing the session at 578.5 yuan per tonne. Rebar futures traded separately on the Shanghai Futures Exchange fell by a similar margin, finishing down 3.96% at 3,779 yuan per tonne.

However, despite the best attempts from CISA to quell growing levels of speculation in futures markets, it appears its latest warning has already been overlooked by traders.

Futures finished higher overnight, recovering some of the ground lost during Wednesday’s day session.

Here’s how the scoreboard finished up:

SHFE Rebar ¥3,814 , 0.50%
DCE Iron Ore ¥585.00 , 0.52%
DCE Coking Coal ¥1,485.00 , 2.66%
DCE Coke ¥2,372.00 , 2.09%

Should the rebound in futures be sustained today, it points to the likelihood that spot iron ore markets will stabilise after Wednesday’s heavy losses.

The buy-the-dip mentality also suggests that traders still retain the view that strong demand and high levels of profitability will encourage steel mills to lift output levels even further ahead of environmental restrictions during winter months, helping to underpin demand and prices for iron ore.

Trade in Chinese commodity futures will resume at 11am AEST.

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