China iron ore futures soar before new buying limits go into effect

22 August 2017

China's iron ore futures rose for a third day on Monday, soaring more than 6 percent, fuelled by concerns of shortages of high-grade iron ore and before curbs on futures purchases come into force.

The Dalian Commodities Exchange on Friday said it will limit the daily purchases and sales of contracts for delivery in January and February to 6,000 lots since Tuesday. The January contract is currently the most active iron ore future on the exchange. Each lot is 100 tonnes of ore.

"Administrative methods cannot change the imbalanced supply and demand situation," said Wang Yilin, analyst at Sinosteel Futures.

The most-active iron ore futures on the Dalian Commodities Exchange closed 6.6 percent higher to 596 yuan ($89.34) a tonne on Monday. The contract rose as high as 601 yuan, the highest level since March 20 this year.

Iron ore futures have climbed 10.8 percent over the past three sessions, the biggest three-day percentage gain since the three days ended Feb. 14, 2017.

Mills are churning out steel products with high-grade iron ore ahead of production curbs that are set to start before the beginning of the northern hemisphere winter.

China's top steel producing province Hebei said earlier this month it will impose capacity limits on steel mills in three cities, including city of Tangshan, during the winter season in an effort to tackle pollution.

The province also vowed last week to fulfil its capacity-cutting targets for this year in steel, cement, coal and glass by the end of September.

"Margins on long- and flat-products are good at mills, which supports them to keep full-load operation and purchase more raw materials even prices are hiking," said a supply manager at state-backed steel firm in Henan.

Analysts estimated that profits on steel products are now 600 to 1,000 yuan a tonne.

"It is unlikely to see the supply gap on high-grade iron ore to be filled until the middle of September, when the September contract approaches delivery," said Wang.

"No one wants to deliver at current price level."

The most-traded rebar futures on the Shanghai Futures Exchange rose 3.6 percent at 3,962 yuan a tonne.

Spot rebar prices rose 0.3 percent to 4,243.04 yuan a tonne on Friday, according to data on the Mysteel website.

Other raw materials also followed iron ore higher. The January coking coal contract edged up 0.4 percent to 1,472.5 yuan a tonne.

Coke futures on the Dalian Commodities Exchange rose 2.9 percent to 2,314 yuan a tonne.

The exchange also said on Friday that it will adjust the margins on coking coal and coke to 12 percent from Tuesday.