Iron ore explodes higher again

Iron ore spot markets ripped higher for a third consecutive session on Monday, coming within a whisker of reclaiming the $80 a tonne level for the first time since April 6.

The price for benchmark 62% fines jumped by 2.55% to $79.93 a tonne, according to Metal Bulletin, extending its rally over the past three days to a mammoth 9.5%.

From the year-low of $53.36 a tonne struck on June 13, the benchmark has now added 50%. That's a near Bitcoin-like gain in such a short period of time.

Courtesy of the latest bounce, it is now higher than where it began the year.

Mirroring the performance of the benchmark, prices for both lower and higher grade ores also gained on Monday.

58% fines rose by 0.5% to $52.04 a tonne, overshadowed by an enormous increase in ore with 65% Fe content which jumped 4.2% to $101.60 a tonne.

The latest buying frenzy coincided with another enormous rally in Chinese iron ore and rebar futures earlier in the session, underpinned by growing optimism that ballooning production margins and strong demand will encourage steel mills to lift output in the period ahead.

"China’s spot rebar prices surged on Monday as gains in the billet and futures markets stimulated trading activity," said Metal Bulletin. "Buyers were encouraged to place bookings amid expectations of a further price rises."

SHFE Rebar ¥3,962 , 3.64%
DCE Iron Ore ¥596.00 , 6.62%
DCE Coking Coal ¥1,472.50 , 0.37%
DCE Coke ¥2,314.00 , 2.91%

Rebar futures on the Shanghai Futures Exchange added 3.64% to 3,962 yuan per tonne, coming within a whisker of topping the 4,000 yuan per tonne level at one point during the session.

Reflecting strength in steel markets, Dalian iron ore soared by 6.62% to 596 yuan per tonne, finishing trade at the highest level since March 20. Like spot markets, the January 2018 contract has added over 15% since the middle of last week, taking its gains from mid-June to near-50%.

“Iron ore prices are rising on demand hopes as higher steel prices encourage Chinese steel mills to boost production,” said Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank.

Dhar says that end-user demand for steel product “remains resilient”, something that he expects to persist in the months ahead.

“We expect Chinese steel demand to be well supported over the next few months as policymakers shore up economic growth ahead of a leadership transition in the final quarter of the year.”

Along with stronger steel prices, Westpac's strategy team says that extreme pessimism towards the outlook for iron ore earlier this year may have contributed to recent gains, along with a slowdown in seaborne supply from major producers.

"We have run with the view that markets were way too downbeat on the near term prospects on iron ore for some time now," Westpac says.

"A key driver of that view was that steel prices were set to continue higher, fuelled by the potent mix of production curbs, solid demand and increased speculative activity.

"On top of this, the key major iron ore producers were not producing at anything like the pace that most analysts were expecting."

While strong fundamentals are likely to remain in place for some time yet, Westpac doesn't see the current rally extending much further, predicting that there's likely to be a price pullback in the near-term.

"To be sure, extreme steel profitability levels suggest limited downside for iron ore, though we would anticipate further near term weakness as speculative longs are unwound/inventory comes back to markets," it says.

Dhar at the Commonwealth Bank shares a similar view.

“We believe that iron ore prices have returned to unsustainably high levels, given the strong incentive amongst marginal iron ore producers to boost output,” he wrote in a note released last week.

“The northern winter months could prove the catalyst for lower iron ore prices as policymakers strictly limit steel production.

“That should translate through to weaker iron ore demand. But that also assumes that the steel sector adheres to policy, which is increasingly more believable, but still a risk given past behaviour,” he added.

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