There's been a big reversal in Chinese iron ore and steel futures overnight

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Iron ore spot markets finished mixed on Tuesday with a small pullback in the benchmark masking strong gains in higher and lower grade ores.

But with Chinese futures doing an abrupt about-face in overnight trade, it looks like the recent rally may have run its course. We’ll see what happens in the day ahead.

According to Metal Bulletin, the spot price for benchmark 62% fines fell by 0.35% to $79.65 a tonne, registering its first decline in four trading sessions.

Despite the weakness in the benchmark, lower and higher grade ores continued to rip high on Tuesday.

The price for 58% fines surged by 2.5% to $53.33 while ore with 65% Fe content closed up 0.9% at $102.50.

In what is now becoming a familiar theme, the strength across most grades coincided with another mind-boggling rally in Chinese iron ore futures earlier in the session.

The January 2018 contract in Dalian rallied 4.21% to $606 yuan per tonne, closing at the highest level in 5-months. Rebar futures traded separately in Shanghai rose by a smaller 0.51% to 3,933 yuan, perhaps explaining the weakness in the benchmark iron ore spot price during the session.

Ballooning steel mill margins, encouraging firms to lift output to meet strong demand, has acted to support iron ore and coking coal prices over the past two months. An increase in speculative activity in commodity futures has also contributed to some of the recent gains as strong upward momentum encouraged more traders to pile in.

However, if the price action witnessed overnight is anything to go by, it likes the latest rally may have run its course.

Futures staged a huge reversal, giving back all of Tuesday’s day session gains and more during overnight trade.

SHFE Rebar ¥3,770 , -4.19%
DCE Iron Ore ¥576.00 , -4.24%
DCE Coking Coal ¥1,439.50 , -2.24%
DCE Coke ¥2,311.00 , -0.94%

Both iron ore and rebar futures fell by more than 4%, giving back some of the gains achieved over the previous five trading sessions.

“The China Iron & Steel Association (CISA) said prices won’t continue to rise significantly. They also warned that planned winter curbs won’t lead to a significant shortage in the local market,” ANZ said in its morning note.

While trying to preempt movements in Chinese futures is often fraught with danger, should the overnight losses be sustained or built upon today, it points to the likelihood that spot iron ore markets will likely retreat when Metal Bulletin releases its daily Iron Ore Index later in the session.

We’ll find out soon enough with futures due to resume trading at 11am AEST.

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