Iron jumps most on record as market goes berserk on China3 min read . Updated: 21 Mar 2016, 01:20 AM IST
Iron ore jumped 19% to $63.74 a metric tonne, the biggest gain in daily data since 2009 and the highest price since June
Singapore/London: Iron ore soared the most ever after Chinese policy makers signalled their willingness to buttress economic growth, boosting the outlook for steel consumption in the top user and igniting speculation that some investors who’d bet against the market had been caught out.
Ore with 62% content delivered to Qingdao jumped 19% to $63.74 a dry metric tonne, Metal Bulletin Ltd. data show. That’s the biggest gain in daily data going back to 2009 and the highest price since June. The surge was preceded in Asia by a rally in futures, with the most-active contract on Singapore Exchange Ltd. climbing 21% to $60 and prices on the Dalian Commodity Exchange rising by the daily limit.
“The iron ore and steel markets have gone berserk—they’ve departed from fundamentals and are heavily driven by sentiment," Zhao Chaoyue, an analyst at China Merchants Futures Co. in Shenzhen, said before the Metal Bulletin price was published.
“Investors are expecting further monetary easing by the Chinese government to boost steel demand."
Australia’s Fortescue Metals Group Ltd. jumped 24% in Sydney trading, where Rio Tinto Group and BHP Billiton Ltd. also climbed after futures prices jumped. Gains in London were muted.
Rio, the second-biggest mining company, rebounded from an earlier decline in London trading and was up 2% by 1:04 p.m. local time, while BHP rose 1.1%.
US producer Cliffs Natural Resources Inc. climbed 21% in pre-market trade by 9:11 a.m. in New York. Vale SA gained 6.7% in Brazil trading.
Iron ore has powered higher in 2016 as steel prices have strengthened, undermining forecasts for further losses driven by mounting low-cost supply from Australia and Brazil and weakening demand in China.
At the annual National People’s Congress at the weekend, the authorities said they’d allow a record high deficit and higher money-supply target to support growth of 6.5% to 7%. At the same time, they also vowed to help cut overcapacity in steel, potentially curbing demand for iron ore.
“There may be some short-covering in the futures markets today," said Xu Huimin, an analyst at Huatai Great Wall Futures Co. in Shanghai, referring to investors closing bets on declines.
“The crazy surge in futures prices has surprised traders and steel mills, as they haven’t seen a corresponding increase in physical orders."
Iron ore’s upswing this year has been accompanied by a revival in other commodities including oil, base metals such as copper, and steel. State efforts to cushion the loss of steel- making capacity in China, including helping retrenched staff, may help to improve profit margins at mills that remain by reducing competition.
Swaps tied to the cost of transporting iron ore also surged. Forward Freight Agreements for Capesize ships in April added about 20% to $2,425 a day, according to data from Clarkson Securities Ltd., part of the world’s biggest shipbroker. Underlying rates for the carriers are at historic lows as a glut of ships compete for whatever business they can get.
Recent gains in iron ore probably won’t last, Goldman Sachs Group Inc. said in a report received on Monday, forecasting a drop back to $35 a tonne in the final quarter. This year’s rally has been driven by rising steel prices in China, a reversal of the normal relationship seen between the raw material and the manufactured product, Goldman said.
“We expect the current rally to be short-lived," analysts Christian Lelong and Amber Cai said in the note, which was dated 6 March, predicting further growth in iron ore supply in the quarters ahead. “The causality will revert sooner rather than later, and steel raw materials will one again drive steel prices rather than the other way around."
There’s also speculation that signs of a turnaround in China’s property market may help to support demand for steel, aiding iron ore. Property-price growth in Chinese cities should begin to feed through into the real economy, leading to a pickup in construction activity and metals demand, according to Sanford C. Bernstein. & Co. Bloomberg