Iron ore price today had the largest one day move ever. It rose nearly 20% in a single day and took the year to date gains in the price to more than 40%.
The price chart below shows the commodity year to date. It has been a silent rally where most of the attention of the market has been focused on oil.
Before the huge one day gain in the price, it has essentially fell off the radar of most traders. We were cautious on the move as we are conscious of the market structure of iron ore trading.
FX Implications
The best thing for bulls is for a slight pull back and volume confirmation. Then we will know if the commodity has really bottomed. We are keenly watched in the Aussie Dollar going forward. The AUD did not move immediately following the price jump but it did breach 0.75 cents in the following days.
On a cross rate basis, shorting NZD to AUD looks really interest here. The recovery in base metal and bulk commodities and corresponding weakness in soft commodities means that a usual stasis rate like AUD NZD would move really fast.
Iron Ore Shares
Given steel is a key ingredient and proxy for Chinese growth. A sustained recovery in the price and demand for the commodity would be positive for Australia. While smaller caps has rallied harder and provided greater gains. Just remember, while you can double or even triple your gains. If you are wrong, the stock like FMG and BCI are worth zero.
We prefer strong cashflow driven diversified miners. Our key exposure is through the Rio Tinto equity. Rio being the world lowest cost producer means that for it to lose money on iron ore. Everyone is counting down to bankruptcy.
Long Term Iron Ore Price
The commodity has been traded on a daily basis for only 5 years where previous pricing mechanism was conducted on a quarterly average and annual basis. Dalian Iron Ore Futures is one of the most commonly quoted price for iron ore.
Much has been written on perplex nature of what is driving the jump in the price when the underlying steel demand in China is still weak. The danger is the current steady flow of credit becomes a flood. Real estate prices in Tier 1 city has already recovered.
While the year to date gains are impressive. Spot iron ore price on a longer price graph shows the severity of the fall. Nothing goes up forever, nothing goes down forever. A dead cat bounce is to be expected. Only time will tell if this rally last.
