Iron ore curve, technicals show rally nearing end: Clyde Russell

Jan 11 2013, 11:29 IST
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SummaryIt's no surprise the iron ore is the current commodity market darling, given record Chinese imports, a jump of 82 percent in prices.

It's no surprise the iron ore is the current commodity market darling, given record Chinese imports, a jump of 82 percent in prices in just four months and a huge storm about to hit a major mining region.

But behind these strong fundamentals is a technical picture showing the steel-making ingredient is heavily overbought and likely to decline in the next few months.

It's always tempting to dismiss technicals in the face of an opposing fundamental picture, but an analysis of the recent history of iron ore prices shows they have been accurate in reflecting turning points.

Asian spot iron ore has retreated slightly from a 15-month high of $158.50 a tonne hit on Jan. 8 and closed on Thursday at $158.20, having rebounded from a three-year low of $86.70 hit last September.

This has been driven by robust Chinese imports, which climbed above 70 million tonnes for the first time in December, as steel mills restocked on the back of a brighter economic outlook for the world's largest commodity buyer.

The solid demand outlook comes as Cyclone Narelle bears down on Western Australia, home to the bulk of mines operated by world number two and three producers Rio Tinto and BHP Billiton.

While the category four storm, the second-strongest type, will help keep prices buoyant in the short term as the market frets about supply disruptions, this will only serve to make iron ore appear more technically vulnerable.

Iron ore swaps in Singapore normally trade in a mild backwardation and deviations from this generally herald a change in the direction of prices.

Currently the market is in steep backwardation, with the front-month contract commanding a substantial premium over those for later delivery.

By 11:10 a.m. in Singapore, the front-month contract was at $150.06 a tonne, 14 percent higher than the six-month contract and 19.5 percent above the 12-month.

This is a steeper backwardation than was in place just prior to iron ore's two previous sharp declines in price.

On Sept. 7, 2011, the front-month contract was 6 percent above the six-month and 14 percent higher than the 12-month. In the following seven weeks iron ore tumbled 35 percent.

A bigger decline of 42 percent was recorded in the five months from April 13 last year, when the front-month contract was 5 percent higher than the six-month and 10 percent above the 12-month.

The shape of the curve also

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