The price of iron ore has surged to its highest level in more than two months after the People’s Bank of China (PBoC) opted to trim interest rates.
At the end of the latest session, benchmark iron ore for immediate delivery to the port of Tianjin in China was trading at $US62.50 a tonne, up 3.3 per cent from its prior close of $US60.50 a tonne.
The offshore move is just the latest upswing in a one-month rally that has driven the commodity almost 35 per cent above the 10-year low of $US46.70 a tonne reached in early April.
Its current mark is the highest since March 2.
The startling recovery came straight after dire forecasts came rolling in from analysts in April, with Goldman Sachs suggesting the commodity may never hold above $US50 a tonne after 2015 and Deutsche Bank, Citi and the Abbott government all warning of falls into the mid-$US30s.
Since those expectations were made public the commodity has been driven higher by rising oil prices, Chinese stimulus and supply cut signals from both BHP Billiton and Vale as well as several distressed junior players.
While at first it was viewed as a dead cat bounce as traders looked to cover heavily short positions, the duration and size of the rally is providing hope to the sector that a lowpoint in the cycle may already have been reached.
This belief was supported by news of a rate cut from Beijing late on Sunday, delivering stimulus to the world’s second largest economy and largest consumer of iron ore.
The PBoC said it would reduce its benchmark one-year lending rate by 25 basis points to 5.1 per cent.
However, the threat of a heavy oversupply in coming 24 months as BHP, Rio Tinto and Vale raise production and Gina Rinehart’s Roy Hill mine enters operation still looms large and puts a cap on potential gains.
There have also been reports of a small uptick in Chinese domestic production in recent weeks in line with the rising price, which may be a signal that the commodity may soon settle in the $US50-$US60 a tonne range.
Goldman, meanwhile, has retained its bearish outlook, saying the rally represents little more than an opportunity to ‘go short’.
“The rally is taking place during the early stages of a long bear market that in our view is set to last well into the next decade,” analysts Christian Lelong and Amber Cai said in a report, according to Bloomberg.
“Market fundamentals will reassert themselves sooner rather than later,” they added, suggesting investors “consider this as a window to take short positions.”
Source: Business Spectator
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