Iron ore has suddenly become very bearish, going down for 9 consecutive days from 140+ to 110+. Below is the 6-month price chart.
Sentiment seems to have broken down. Prices have gone into fresh 2022 lows. The biggest reason is that the players in the sector were too optimistic on future demand potential. Prices were bid up based on hope, but the hope has been shown to be somewhat misplaced.
There is a decent chance of a bounce at this point, as the drop has been rather drastic. Also, a speech by the Chinese president hinting at stronger stimulus efforts is supportive. A short-covering rally may occur. Thus large short positions are risky now.
Iron ore has been rangebound this year, trading between about $120 to $170.
Currently, it is at about $146, roughly in the middle of its 2022 trading range. It has been trending up the last few weeks because of China’s COVID reopening. The reopening and stimulus impulses should support prices for the short-term. Downside risks include Chinese policy response against high commodity prices, and actual commodity demand not meeting expectations.
This is not the optimum setup for shorting. Prices need to go closer to the upper bound of the trading range first, and there should preferably be emerging signs of peaking demand. However, no one can predict the timing of the turnaround in price movement accurately, so we just to constantly monitor news flow and prices. The turnaround can happen anytime, even tomorrow or next year.
Personally, I am hoping for prices to go much higher, as the probability of successful short trades increases the higher prices go. When prices burst above $200 last year, it was a once-in-a-generation type of shorting opportunity. I don’t expect a repeat this year, but if prices can reach at least $180, it would still be an excellent trading opportunity.
Since my last post 2 weeks ago, the price of iron ore has surged further from about $124 to as high as $148. It is currently at about $137. The surge is all based on hope that demand will improve, fundamentals have not improved at all.
China has just stated its intention to suppress the iron ore speculators driving up prices. Could this be the start of a sentiment shift? It is possible, though there may not be a straight one-way journey down. China did the same thing last year, and prices went down, back up and then down again. In my opinion, the fundamentals of supply and demand will matter most in the end. Thus it is best to monitor news flow pertaining to them, in order to gain clues on medium to long term price direction.
If you are itching to trade iron ore equities, in my opinion the downside risk-reward ratio is more attractive than the upside. Do note that this week the Chinese are on holiday, so the number of traders is smaller, which would imply greater unpredictability of the price action.
Iron ore is used in the production of steel. China is the dominant user of iron ore, and imports it mostly from Australia and Brazil. Like many commodities, it is highly volatile. Prices often overshoot and undershoot fundamentals by a large degree.
Last May (2021), benchmark iron ore prices reached a record high of around $233.10 per metric ton. It subsequently plunged below $90 in Nov 2021, before staging a steady rebound. The price as of today is about $124.
The rebound was driven mainly by expectations of higher demand this year. However, there is no certainty of actual demand meeting these expectations. There are too many forces at play affecting both supply and demand to be able to accurately predict future price. Some of these forces are Chinese property sentiment, policy developments on infrastructure, weather and mining output curtailments.
Iron ore stocks have rebounded by as much as about 50% based on this optimism. If the optimism proves to be unfounded, expect the prices to retrace. It may be opportune to take a small bet against iron ore, or monitor closely for developments in the sector to gather more clues on future trend before entering a position.