Iron ore prices remain firm for the moment, with benchmark 62% fines rising 0.7% to $73.10 a tonne, 65% Brazilian fines rising 0.2% to $87.40 and 58% fines climbing 1.1% to $46.13 a tonne.
Below you can see the price of iron ore since its most recent slump:
Currently, it is sitting in the mid-term band we proposed in November.
The question now is how long the rally will continue?
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Iron ore rally so far: two factors
The rally we are seeing now comes down to a couple of factors.
The short-term factor of most interest is the inventories at steel mill warehouses.
Via Reuters, according to Darren Toh of data analytics company Tivlon Technologies:
‘Our data analytics model shows low iron ore inventory at steel mills’ warehouses. So, they are looking to replenish.’
Another factor is that winter production curbs are set to be eased in February.
Going forward however, the story could be set to change.
Iron ore rally could only last another month, maybe two
Previously, we have discussed the importance of PMI reports — they are a barometer for economic activity.
With regards to iron ore, the latest Caixin China General Manufacturing PMI is pointing to a bearish outlook.
It has unexpectedly dropped to 49.7 in December from 50.2, missing a market consensus of 50.1:
For reference, below 50 represents a contraction.
The trend has clearly been downward as you can see, and once a lag of a month or two has been factored in, there is a correlation between PMI readings and iron ore prices.
So this may mean that the bump in iron ore prices could be set to only last for another couple of months.
The factor on the horizon that could give increased support to prices would be Chinese stimulus — a story we have been covering.
The outlook for stimulus has been improving, with BAML’s Asian economics team saying the following (via Business Insider):
‘We believe that there is still ample room for RRR [reserve requirement ratio] cuts in 2019, given the current RRR level is still relatively high. The PBoC will likely take multiple measures to help the transition from liquidity loosening among banks to better credit support to the real economy.
‘Going forward, faster credit expansion and property policy easing will be crucial to economic cycle rebooting in the coming months.’
So although the PMI is looking bearish, there could yet be life in iron ore prices, but this hinges on what the Chinese government’s next move is.
We will keep you posted.
For Markets and Money