A clump of iron ore from a mine. Picture: REUTERS
A clump of iron ore from a mine. Picture: REUTERS

Iron ore’s surprise surge above $90 (R1,335) a tonne  amid optimism on the outlook for Chinese demand has sowed consternation among market watchers, with some questioning the move as prices fluctuated on Tuesday.

“There is a little bit of confusion as to why it’s gone nuts,” Tomas Guttierez, an analyst at Kallanish Commodities, said from Shanghai, commenting after Monday’s 5.2% jump. “I do find it hard to see what’s really changed.”

Iron ore’s recent turnaround since sinking into the $70s in mid-November extends a tumultuous year for the steelmaking ingredient.

Earlier in 2019, prices blasted to multiyear highs after a major supply outage in Brazil, before retreating on signs of higher shipments. The recent spike came amid pledges from China’s leadership to strengthen key infrastructure spending. Investors have interpreted a recent Politburo statement on the economy as bullish for infrastructure, said Guttierez.

“It’s possible that people are just betting on the outcome of the Central Economic Work conference, based on the change of tone here,” referring to a separate conference that brings together top leadership to approve goals for 2020.

Futures in Singapore initially advanced as much as 1.1% to $92.91 a tonne on Tuesday, the highest intraday price since September 19, before trading 0.4% lower at $91.53. Last week, prices gained 3.2%, advancing for the third week in four as steel prices rose and mills’ profitability improved.

“We’ve definitely seen some less-worse data come out from China and that’s precipitated a bit of a bounce,” said Daniel Hynes, senior commodities strategist at Australia & New Zealand Banking Group. “The upside does look limited from here, though. There’s not much sign of any meaningful pickup in demand over the longer term.”

Extra credit in China’s economy has flowed through to the construction sector, according to Citigroup, which said its own measure of building activity hit a record for November.

Analysts including CRU Group had previously noted manufacturers and constructors were getting busier before winter. That is  partly to offset an early Lunar New Year break in late-January.

Since the supply shock in the first half that lifted iron ore far above $100, global production has recovered, including from leading miners in Brazil and Australia.

Brazil’s Vale SA has said output may reach as much as 355-million tonnes in 2020, substantially higher than 2019’s 307-million to 312-million tonnes. That outlook had spurred expectations for lower prices.

“The market was probably pricing in a worst-case scenario, and that has improved slightly,” Hynes said.

But the latest rally “doesn’t seem to be based on fundamental indicators, which still point to relatively subdued outlook.”

Bloomberg