MARKETS SPECTATOR: Soaring ore

Iron ore stocks have followed the commodity's spot price back up as several international factors combine to limit supply and increase demand.

Iron ore stocks have jumped out of the gates once again over the last few days after another huge jump in the commodity's prices. Iron ore was up 6.8 per cent to $US117.2/t overnight and has now jumped 12 per cent since the end of China’s Golden Week holiday. Since the lows of $US86/t it is up more than 36 per cent.

There’s not one reason behind the rebound but rather a series. These include:

– The continued injection of liquidity into the Chinese economy.

– The return of traders and steel mills to the market, with the buying activity marking a shift in attitude among Chinese traders who triggered the recent collapse in prices as they stepped back from the market and ran down stock piles.

– Strikes at South Africa’s biggest iron ore mine Kumba, which is owned by Anglo American.

– Sentiment towards Chinese stocks is starting to improve a little, with the Shanghai Composite now up 5.8 per cent since the low 10 days ago.

In terms of stocks, both Fortescue Metals and Atlas Iron have paced the gains in the underlying commodity, rising 38 per cent and 35 per cent respectively from their September lows. The circled area of the chart below shows the rebound seen in iron ore prices and the major stocks.

image

Source - Bloomberg

Also, the chart below of Fortescue Metals looks interesting from a technical analysis perspective. We note that the downtrend (yellow line) that has been in place since early 2012 has been broken to the upside, indicating a possible change in trend may be occurring.

image

Source – Bourse Data

There’s no doubt that the beaten up miners benefit from these fast and furious rallies. However, with the attitude among buyers and traders improving in China, the big question is where iron ore prices will settle in the medium term.

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