Iron ore rebound rips the roof off

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It’s all over. Australia’s brief flirtation with economic ruin, as the price of our primary export commodity crumbled, is happily behind us.

Or so you would think listening to the more excitable segments of media commentary the past few days.

We are certainly in seeing a feverish short-covering scramble/steel mill restock, with spot now a good 23% above it’s low in early April (bull market!).

Iron ore

And it’s not over yet, with Dalian futures up a blistering 5.5% in the overnight session on Friday.

Although I was expecting a bounce, this has undoubtedly been a far more violent reaction than I’d anticipated. The proximate cause was BHP delaying expansion from 270mt of capacity to 290mt by six months or so. There’ll be a strong element of short-covering, however what’s really driving the rally is plain old FOMO (fear of missing out). These kinds of moves can only occur when steel mills are in a mad dash for cargoes. If you perceive your competitors starting to scramble for stocks, your only choice is to scramble yourself or face higher prices tomorrow. Naturally, this results in even higher prices tomorrow.

Enjoy it while it lasts. BHP’s delay has kept a number of juniors, FMG included, in the game longer than they otherwise would have been. Thus, unless there is a material pick-up in steel demand imminent in China, the medium-term supply-demand imbalance in the iron ore market has actually worsened as a result of BHP’s move.

It is still not outside the realms of possibility, but the iron ore rally makes it very hard to see the RBA cutting interest rates next month. As I highlighted a fortnight ago, assuming a dovish Fed this week, and an RBA hold next week, this points to considerable upside for the AUDUSD in the short-term.

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