LONDON, Aug 7 (Reuters) – Chinese steel and iron ore prices continue to rise in lock-step. In Shanghai today the most active steel rebar contract went limit-up, surging 7 percent to 4,013 yuan per ($597) per tonne, its highest level since April 2013. Where Shanghai steel leads, Dalian iron ore follows.
The most-traded contract on the Dalian Commodity Exchange jumped as much as 7.3 percent to 587.50 yuan per tonne at one stage, its highest level since March 21. And where Dalian leads, the rest of the iron ore world follows. On the Singapore Exchange the cash contract has just punched up through the $77-per tonne level, also for the first time since March.
There is much speculative froth in this mix. Market open interest on both Shanghai steel and Dalian iron ore hit record highs last month and is still at historically elevated levels. However, this is not just irrational exuberance.
There are good reasons for steel’s extended rally and as long as steel prices generate high margins for China’s steel mills, there will be a knock-on effect on iron ore pricing.
That said, the 140-million tonne elephant in the room for iron ore pricing is the amount of the stuff now sitting in Chinese ports. The market is ignoring it right now but for how long it can continue doing so is a moot question.
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