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Iron ore spike driven by Chinese cabbies as speculation gets out of hand

Issued at 2017-01-22



Westpac says "Chinese cabbies" and other retail investors may well have fuelled the stunning moves in iron ore, Australia's largest mineral export, over recent weeks.

Analysts say "astronomical" trading in iron ore futures on the Chinese Dalian Commodity Exchange appears to have fuelled iron ore's rise from $US60.36 ($A79.09) per tonne to $US70.46 last week – which has been followed by a near-wipeout of those gains this week.

Nearly all of last week's 16 per cent gain has vanished as the price of Australia's largest mineral export retreated to $US62.78 on Wednesday.

According to Goldman Sachs, there have been two days in the past month where futures volumes have been greater than the total amount of iron ore that China actually imported for the whole of 2015 (over 850 million tonnes).

There was a similar spike in iron ore in early March, when the price spiked nearly 25 per cent to $US63.74 per tonne, only to lose those gains within days.

Higher volatility

"The volumes on the Dalian futures exchange have exploded over the last couple of weeks," said ANZ commodity analyst Daniel Hynes. "We don't really have any clarity on who is behind these volumes.

"All I can say that there has obviously been a lot of speculation on commodity markets in the past and it seems to have picked up in the iron ore market in the past few weeks."

However, in the long run the price of iron ore would be determined by fundamentals, he said.

"It's not ultimately going to cloud the underlying picture but in the short term it could mean that the volatility can be much higher than we would normally experience."

Westpac currency strategist Sean Callow stated in a recent note that "China cabbies trading iron ore" may well explain the price movements.

"Hard data on China's economy has been a bit lost amid the stunning moves in iron ore prices," he said. "Supply disruptions may well have impacted these spot prices but the futures markets are showing clear signs of speculative fever. 

"Volumes on the Dalian exchange are astronomical in comparison to Singapore and New York."

Mr Callow said the price movements "muddies the picture" for Australia's terms of trade but "at the very least" export prices were now far better than two months ago. That, in turn, raised fair value estimates for the Australian dollar.

Speculation worries

Goldman Sachs analysts Matthew Ross and Jie Ma said this week that iron ore volumes traded on the Dalian Commodity Exchange are up more than 400 per cent from a year ago.

In part, this was due to increased fixed-asset Chinese investment, a bring-forward of steel production, and mining disruptions, they said.

However, "the one driver that concerns us most is the increased speculation," they wrote.

The moves have prompted Chinese exchange authorities, including Dalian, to tighten rules on the trading of some contracts. 

The World Bank, meanwhile, has just released revised forecasts for iron ore to $US50 per tonne this year, $US51.50 in 2017 and $US56.20 by 2020.

Previous forecasts were $US42 for this year, $US44.10 in 2017 and $US51 by 2020.

 

 


Source: The Sydney Morning Herald



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