Iron ore price increases in China could prove to be fleeting

China continues to draw down iron ore inventories (see discussion), sharply reversing the trend of the past few years.

Source: DB

Speculative activity in iron ore and steel is picking up sharply, particularly as short-sellers are blown out.

Bloomberg: - Trading in iron ore tripled last month from a year earlier on speculation of increased demand this month after China holidays, The Steel Index said.

Swaps and options trading in iron ore across all exchanges and clearinghouses was 19.63 million tons, near the record of 20.3 million tons in September 2012 and up 215 percent from 6.24 million tons a year earlier, The Steel Index, which publishes iron ore prices, said in an e-mailed report today. Prices of ore with 62 percent iron ore content delivered to the Chinese port of Tianjin climbed 5.3 percent in January.

Volatility increased in the second half of January as “some traders cut short positions, further boosting liquidity,” The Steel Index said.

But according to at least some researchers, this is by no means the start of another bull run in China's or global iron ore markets.

Bloomberg (different story from above): - Iron ore may fall 35 percent by the year-end after advancing to $170 a metric ton in the first half as mines in China boost production, cutting import demand in the world’s largest buyer, according to Westpac Banking Corp.

The price of the steelmaking raw material may tumble to $110 a ton by the end of 2013, according to Sydney-based senior economist Justin Smirk. ...

Iron ore has surged from a three-year low in September as China’s growth rebounded in the final quarter and imports rose to a record. Bank of America Corp. said last month the commodity may fall to $110 a ton by the year-end, while Deutsche Bank AG and JPMorgan Chase & Co. also predict a second-half slump as worldwide supply increases. Some investors deem a drop of 20 percent or more to be a bear market.

Many economists feel that this inventory correction is temporary and more technical in nature, and as production picks up, China will ultimately return to the days of iron ore oversupply (see discussion).

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