After tumultuous few years, commodity price have enjoyed a rare moment in the sun in 2016. A weaker US dollar and renewed optimism over the outlook for China’s economy, along with great swathes of short covering as traders unwound bearish bets, have led to some impressive gains in recent months.
In Australia, the enormous surge in the iron ore price has received plenty of attention. From the lows struck last year, the spot price for benchmark 62% fines has soared by 43.8% according to pricing from Metal Bulletin, resulting in iron ore posting the largest percentage gain of all major commodities so far this year.
Any number of factors have been hypothesised to explain the amazing rally.
Increased construction activity in China, hopes for higher prices on the back of China’s push to restructure its enormous mining sector and even speculation over a scheduled flower show bringing forward steel production before a government-enforced curtailment have all been presented as factors to explain the sudden, and largely unexpected, bounce.
While they could be responsible for the renewed optimism towards iron ore, Robert Rennie, global head of market strategy at Westpac, believes another factor could be behind the recent rally — an increase in speculative buying.
“I see signs of increased speculative activity as playing an important role in this recent bounce in commodities, especially in iron ore,” says Rennie.
He points to the chart below to justify his view, and on the evidence presented, it suggests something unusual is afoot. It tracks the equivalent metric tonnes of iron ore traded in futures on the Dalian Commodities Exchange, going back to when Chinese iron ore futures first started trading in late 2013.
Source: Business Insider