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Iron ore continues its ‘baffling’ surge

The price of iron ore has bounded 4 per cent higher in offshore trade, setting a new two-year peak in the process and continuing to “baffle” analysts.
Numbers from The Steel Index show iron ore surged 4 per cent to $US82.80 a tonne overnight, up from $US79.60 the previous day.
The last time the commodity was higher was on September 1, 2014, when it settled at $US83.60.
The key Australian export has enjoyed a remarkable 2016, bouncing around 85 per cent from where it started the year and more than doubling from February lows of around $US38 a tonne.
Analysts have only recently started to upgrade their forecasts after being caught short by the extent of Chinese demand and, more recently, the prospect of rapid growth in US infrastructure spending following the election of Donald Trump.
Most still predict a pullback from current levels, which could begin shortly during the seasonally weak demand period around Lunar New Year (Chinese New Year).
Often there is a degree of buying pressure in the two months’ prior, with prices sliding around the event as activity in China grinds to a near halt for the better part of two weeks.
Lunar New Year falls on January 28 in 2017.
The seasonal stockpiling has been noted by Macquarie analysts as the latest data reveal inventories of 28 days’ worth of consumption as at December 7, up from 21 days just six weeks’ prior.
“This is the highest level since early-February and is a key reason why we expect iron ore prices to soften from here,” the investment bank said.
“We continue to be baffled by the ongoing strength in iron ore prices, as fundamentals are clearly not supportive, albeit for shortages of high grade iron ores as we have written about previously.”
The analysts also took a concerned view over a rise in Chinese commodity imports through November as prices shot higher.
“Our interpretation of the data is generally more bearish, in that while it does reflect robust underlying demand, it perhaps more significantly demonstrates the rapid increase in the availability of supply in response to the higher prices, certainly for iron ore and coal,” Macquarie said.
While demand is starting to pick up as higher prices encourage the return of marginal producers that were forced out earlier this year, there is also a lingering cloud of Chinese policy intervention over speculative trading.
Beijing is reportedly eyeing measures to curb speculation that has ensured volatile commodity price action and should they pull the trigger, the initial impact could be significant.
“At present, we have only seen rhetoric that the government are not happy (with the potential closure of night trading sessions), but given what happened with A-shares last year more aggressive regulation is certainly possible,” Macquarie said.
“This would reduce volatility in commodity markets, but would also see an abrupt removal of retail support for commodity prices.”
In the meantime iron ore-exposed companies are enjoying a rapid rise on sharemarkets, with Rio Tinto climbing 0.7 per cent in London trade overnight and BHP Billiton jumping 3.4 per cent.
This came on the back of similarly solid gains in local trade yesterday, with oil-exposed BHP outperforming as crude prices reached a new 18-month high.
Both mining giants are trading around multi-year peaks.
Source: The Australian.Com