Iron ore futures soar again on Chinese steel mill closures

25 November 2016

China's pledge to shut down inefficient steel mills and address chronic pollution has triggered a rally in iron ore futures as traders bet a more profitable steel sector will underpin strong demand for raw materials.

Iron ore futures rose more than 6 per cent on Thursday morning as traders piled in for a third straight day pushing up prices to near three-year highs. It has been a rollercoaster month with the futures price for the January 2017 iron ore contract surging by more than 20 per cent on China's Dalian Commodity Exchange in the first two weeks of November before plunging last week. The fall came after regulators raised transaction fees and margin requirements in a bid to curb rampant speculation.

Since Tuesday, however, investors turned their focus to the government's latest five-year plan and its renewed commitment to cut capacity in the steel sector. They also cited a move by Tangshan city in the steel-making province of Hebei, ordering its mills to reduce production because of pollution problems. Over the past three days, the January 2017 iron ore contract is up more then 17 per cent.

"Steel mills, under pressure to reduce emissions, are increasing their demand for high-quality iron ore," said Cheng Xiaoyong?, via phone from Zhejiang where he is principal analyst at Baocheng Futures.

This demand has also been driven as mills try to reduce costs by lessening the amount of coking coal used in the process."Coking coal prices are through the roof which has boosted demand for higher-grade iron ore," said Oscar Tarneberg?, regional manager for Asia at The Steel Index.
Nothing new

At the same time, this trend is not new and there is some confusion as to why there has been such a strong rally in iron ore futures this week. Analysts said the moves were being driven by sentiment rather than any significant new developments."In China people pile money into real estate, equities and futures," said Mr Tarneberg. "When they move out of one, they move into another."

The popularity of commodities futures contracts this year among retail investors has been underpinned by limited investment options in China as well as tight capital controls preventing them from moving their money overseas and low returns from bank deposits."There is a lot of speculation in the market," said Xu Xiangchun?, chief information officer of Mysteel.

He said this has focused on everything from recent approvals to build more railways and expressways to the Tangshan anti-pollution measures. However, Mr Xu said the recent infrastructure announcements were not out of the ordinary and the Tangshan measures could actually decrease demand for iron ore as the government is calling on mills to reduce steel production."I don't understand why the recent rally has been so strong," he said.

Some traders have pointed to a report out this week from Goldman Sachs, in which analysts lifted their iron ore price forecasts.Another possibility being talked about by traders is a move by fund managers into industrial metals futures to protect against the depreciation of the Chinese yuan.