The price of iron ore jumped almost 20% on Monday to $63.74, the biggest one-day gain on record.
The start of the iron ore price run was driven by seasonal restocking factors, but by now the steel price has taken over as the main driver, explains Credit Suisse. When steel prices rise, so does iron ore. The price of steel in China has rebounded by 20% from its trough in December.
What is causing the steel price hike then? The People’s Bank of China‘s recent banks’ required reserve ratio cut allows steel traders to lever up again, “and the low traders’ inventory back in January have been the main causes of the hike,” noted Jefferies‘ Po Wei.
Looking at it another way: End demand for steel has not improved. About 70% of steel demand in China comes from the construction sector, but prices of cement – another important ingredient to building apartment complexes – have not improved. “After the Chinese New Year, cement demand has been recovering very slowly with some cities continuing to report a price fall,” reported Wei. As a result, “underlying demand for construction steel must have been weak as well.”
Source: barrons