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Iron ore has biggest rally in years, but doubters still aplenty

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Iron ore is enjoying its biggest rally in years, outpacing gold to be the best performing commodity so far in 2016, but still-weak forward prices show it may be tough to stretch the bullish outlook.

[MANILA] Iron ore is enjoying its biggest rally in years, outpacing gold to be the best performing commodity so far in 2016, but still-weak forward prices show it may be tough to stretch the bullish outlook.

Improving steel prices in top market China are helping fuel iron ore's climb as producers gear up for a seasonal uptick in demand. Yet there is no shortage of doubters who see gains in the bulk commodity as fleeting given a large glut and challenges for China's economy. "It's hard to imagine this being a sustainable boom. I think the headwinds are still too strong in the market," said Daniel Hynes, commodity strategist at ANZ.

Topping US$50 a tonne on Monday for the first time since October, iron ore has risen more than 21 per cent so far this month, its biggest such rally since December 2012.

With a 17 per cent year-to-date gain, iron ore is now the best performing major commodity this year, after falling for the past three years.

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Iron ore's upswing began on the first day of China's return from the week-long Lunar New Year holiday, when it surged 5.6 per cent. It was the first time the price rose that much after China's biggest festive season since index pricing began in late 2008, based on Thomson Reuters data.

A Shanghai trader attributed the upturn to a lack of available domestic iron ore, as mine workers took off for the Spring Festival, some even a week prior, and were only set to resume production this week.

Others pointed to speculative buying. "Iron ore has stayed low for a long time, so once people saw it recover they hoped it would last a bit more," said Wang Di, analyst at consultancy firm CRU Group in Beijing.

The rally steepened the backwardation on the iron ore forward curve on the Singapore Exchange, with the front-month at a nearly 30 per cent premium over the 12th month contract, up from 25 per cent a month ago. Prices from November 2016 through December 2017 remain below $40 a tonne.

That suggests many in the market do not see the current rally as sustainable.

The spike lifted open interest, or open contracts, on the Singapore Exchange to record highs, which "may indicate market participants are taking advantage of the mini-rally to lock in higher prices", said Adrian Lunt, head of commodities research at the exchange.

Prolonged price gains in iron ore would be a relief to top miners Vale, Rio Tinto and BHP Billiton, whose earnings have been hit by prices that have tumbled over 60 per cent in the past two years.

However, further gains in iron ore hinge on China's steel market. As the world's No. 2 economy transitions from investment-led expansion to consumption, "metals demand growth will slow if not reverse over the coming years", said Julius Baer analyst Carsten Menke. "We believe that steel consumption in China has peaked and will continue to fall over the coming years, barring major 'old-school' stimulus by the government," he said.

REUTERS

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