Iron Ore Price Spikes A Record 19 Percent On China Stimulus Hopes

Prices for iron ore, a key industrial metal, spiked by 19 percent on Monday, posting its single largest gain on record.

The huge surge in in the price of the commodity, which went from $52.40 a ton to $62.60, or a rise of $10.20 a ton, was described by Metal Bulletin as the largest spike since it began tracking the daily value of the ore seven years ago. It was the fifth consecutive day of price rise for iron ore.

“The rip in iron ore is nothing short of breathtaking,” Bespoke Investment Group wrote in a research report quoted by CNN. “The strength in metals is something to behold and if they were to turn around, it would mark the end of a major stress on global equity and credit markets.”

The sudden spike in iron ore prices comes after Chinese officials promised to spend more on building roads and railways. The Chinese government stated over the weekend that its stimulus program would seek economic growth rather than restructuring this year, in spite of a significant cooling-down of its long-running yearly economic growth; the Wall Street Journal reported that China recorded its slowest economic growth in 25 years, with only a 6.9 percent increase in 2015. The report projected an even tougher year ahead.

Iron Ore Price Spikes A Record 19 Percent On China Stimulus Hopes
A worker watches a furnace dumping steel at a plant of Chongqing Iron and Steel (Group) Co., Ltd. in China. [Photo by China Photos/Getty Images]

Despite this grim prediction, The Australian reported that the Chinese government is targeting a growth rate of 6.5 percent to 7 percent for 2016. Premier Li Keqiang also pledged to spend 800 billion yuan on building railways and 1.65 trillion yuan on road construction.

Analysts say the sudden spike happened because of confidence in China’s continuing hunger for industrial metals. Iron ore is a key component in the process of making steel for industrial purposes. China is currently the world’s second-largest economy and the world’s largest consumer of iron ore.

Producers and exporters, such as Australia, stand to benefit from this rise in prices, as iron ore is the country’s largest export good. Iron ore futures in Asia soared particularly high, with PoundSterling Live reporting a 21 percent rise in ore prices in Chinese exchanges on Friday, which was followed by similar rises worldwide.

Private corporations also stand to make a handsome profit off of this dramatic increase. Yahoo News reported that Fortescue Metals chairman Andrew “Twiggy” Forrest saw the value of his shares jump by $612 million in a single day.

Iron Ore Price Spikes A Record 19 Percent On China Stimulus Hopes
A worker passes by molten iron in Chengde Steel Plant in China. [Photo by Feng Li/Getty Images]

Not all observers are so bullish, however. Some commentators and analysts expect the commodity’s price to quickly weaken again and are skeptical of the idea that the price spike necessarily translates into more buying.

“We don’t have enough evidence to suggest a turnaround, we’re not seeing a huge upswing in (physical) buying,” said Robin Bhar, a commodities analyst at Société Générale quoted in The Australian. “This is a short covering bounce,” he said.

Goldman Sachs also predicted the rise in prices would be short-lived, according to Reuters.

“We expect the current rally to be short-lived in the absence of a material increase in Chinese steel demand, and steel raw materials will once again drive steel prices rather than the other way around,” Goldman analysts said.

The investment bank stuck to its bearish stance, keeping its iron ore price forecast for 2016 at $38 a ton and predicting $35 for the next two years. The report stressed that while iron ore has risen more than 22 percent this year, making it the best-performing commodity of 2016 so far, this sudden spike followed losses of around 70 percent for the past three years. The fall before the recent rise was mainly caused by a global production surplus and weaker Chinese demand for steel. Goldman remains skeptical that Chinese steel production would actually increase.

The global market for iron ore overwhelmingly depends on whether China will successfully carry out its ambitious infrastructure projects and resurrect demand. Only time will tell if this approach is sustainable.

[Photo by ChinaFotoPress/ChinaFotoPress via Getty Images]