The factors that drove iron ore prices to crazy levels earlier this year appear to have returned

Tangshan is the largest steel manufacturing city in China. Photo by Xiaolu Chu/Getty Images

Iron ore has recorded its first back-to-back gain since the middle of May, and it looks like there’s further significant upside to come based on futures pricing.

According to Metal Bulletin, the spot price for benchmark 62% fines jumped by 2.06%, or $1.03, to $51.11 a tonne on Monday, extending its two-day gain to 6.1%.

Year to date it has now risen by 17.3%.

The gain followed news that the key steel-making city of Tangshan would start another round of emission cuts from steel mills beginning on June 14, something that was likely initiated to ensure improved air quality in the city as it continues to host a International Horticultural Exposition that will run through to mid-October.

When curbs on steel production in the city were announced earlier this year, it contributed to an enormous gains in steel, iron ore and coking coal prices, driven higher by unprecedented levels of speculation in Chinese commodity futures markets.

Despite the belief expressed by officials that these speculative forces have been eliminated, it appears that history is repeating yet again, pointing to the likelihood of another surge in the spot iron ore price later in Tuesday’s session.

The most actively traded iron ore future on the Dalian Commodities Exchange rose by a further 4.2% in overnight trade, closing the session at 372 yuan. Coking coal futures jumped by 4% while rebar futures traded on the Shanghai Futures Exchange rose by a smaller 2.9%.

While all are clearly linked, the indiscriminate buying across all three contracts suggests that it was largely driven by speculative forces, again.

Should the gains in iron ore futures be sustained, it suggests that there’ll be another hefty increase in the spot iron ore price on Tuesday should the recent relationship between the two hold true.

Trade in Chinese commodity futures will resume at 11am AEST. Metal Bulletin will release its daily Iron Ore Index later in the session at 8.30pm AEST.

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