Iron Ore Volatility at Record as China Stocks Gyrate

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Iron ore’s roller-coaster week, which saw back-to-back records set for a daily decline and rally, lifted volatility to an all-time high as prices were whipsawed by gyrations in China’s stock markets.

Ore with 62 percent content delivered to Qingdao gained 2.3 percent on Friday to $50.10 a dry metric ton, after surging 9.9 percent on Thursday. It had plunged 10 percent to $44.59 on Wednesday, the lowest in at least six years, according to Metal Bulletin Ltd. Prices are 9.3 percent lower this week after losing 10.9 percent the week before.

“I think it will obviously stick in people’s mind,” Laura Brooks, a senior consultant at CRU Group in London, said by phone, referring to the week’s trading. “The thing is you saw that price heading toward $40 a ton. It creates a lot of nervousness on the mining side of the market.”

Iron ore’s wild ride came as daily swings in Chinese stocks, with authorities seeking to stem a rout, prompted investors to shun, then embrace, risky assets. The shifts in mood fused with concern that low-cost supplies from Rio Tinto Group and Vale SA are surging even as demand slows, spurring a global glut. The rally on Thursday was sentiment-driven as a rebound in Chinese equity markets eased concern over underlying demand, according to Australia & New Zealand Banking Group Ltd.

“Volatility has come back into the market,” said Brooks, who expects prices in the $40s to be commonplace in the second half. “For the price to drop that much in a space of a week, I don’t think fundamentals can move that quickly to trigger that. It’s much more sentiment-driven.”

Stock Rebound

Iron ore’s 10-day volatility climbed to 95.8 this week, the highest ever, up from 41.2 on July 3, according to data compiled by Bloomberg. Figures for volatility tracked over 30, 50 and 100 days were also at records.

Stocks in China extended gains on Friday as government measures to stem the rout started to take effect. With the Shanghai Composite Index recording the biggest two-day advance since 2008, iron-ore futures rose 1.5 percent on the Dalian Commodity Exchange.

Producers’ shares climbed on Friday. Rio Tinto rose 1.5 percent to 2,567 pence by 2:06 p.m. in London, after touching the lowest since 2009 two days ago. BHP Billiton Ltd. climbed

2.5 percent and Anglo American Plc advanced 0.9 percent.

Compared with annual benchmarks that iron ore was traded through until the past several years, Wednesday’s Metal Bulletin price would be the lowest since 2005, according to Clarkson Plc. The end of the annual benchmark system, and development of spot and derivative markets, meant prices now responded to non-fundamental drivers too, according to Morgan Stanley analyst Tom Price.

Increasing Sensitivity

Iron ore has become increasingly sensitive to events like shifts in China’s macro and trade policies, credit conditions and interest rates, Price said. Further falls in China’s stocks will signal more declines in commodity markets, he said.

“Such a short, sharp fall in iron-ore prices goes beyond the current fundamentals,” RBC Capital Markets analysts including Chris Drew said in a note. “While we think this short term sell off is likely to prove excessive, the scope for a meaningful recovery is limited,” they said, forecasting prices will average $52.50 a ton this half.

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