This article appeared in Yield matters on 08 March 2016
“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.”
The move sparked a rally in producer shares. Australia’s Fortescue Metals Group Ltd. jumped 24 percent in Sydney trading, where Rio Tinto Group and BHP Billiton Ltd. also climbed after futures prices jumped. Rio, the second-biggest mining company, rose 5 percent to close at the highest in three months in London, while BHP gained 3.5 percent in U.K. trading.
U.S. producer Cliffs Natural Resources Inc. climbed as much as 30 percent, the most since 2008, and was up 19 percent by 11:54 a.m. in New York. Vale SA advanced 11 percent in Brazil trading.
Iron ore has powered higher in 2016 as steel prices have have strengthened, undermining forecasts for further losses driven by mounting low-cost supplyfrom 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 percent to 7 percent. 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 21 percent to $2,450 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 ton 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 March 6, 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.
“The recent boom of the real estate market and price has positive influence on the steel price,” Michael Zhu, president of Hong Kong-based trader Millennia Resources Ltd. and former global sales director of Vale, said by e-mail. The “market believes the demand for steel will be increased with the recovery of real-estate market.”
By Jasmine Ng and Jesse Riseborough
With assistance from Ranjeetha Pakiam and Alaric Nightingale.