Quants Take Bullish Iron Bet as Yuan-Based Model Flags Rally

Updated on
  • BNP goes long on January futures, with initial target of $68
  • Earlier wager based on model delivered return of about 10%

BNP Paribas SA has reopened a bullish bet on iron ore, saying there’s scope for gains in what will be a further test for a new model that crunches data on activity in China as well as the yuan, and which delivered a 10 percent return in its inaugural trade.

The bank is long on the SGX AsiaClear January contract, with an initial target of $68 a metric ton after taking a position at $61.80, analysts including Gabriel Gersztein, head of foreign exchange and rates for Latin America and commodity quant strategist, said in a report. The BNP model puts spot ore at $76.15.

Iron ore sank into a bear market last month as China readied steel output cuts and mine supplies rose, and investors now are seeking to gauge whether the final quarter will bring further losses or a rebound. BNP lifted the veil on its iron ore model in July, and followed up with a long bet that was closed in mid-August as prices rallied. The decision to exit that trade meant the bank avoided being in the market as spot prices plunged more than 20 percent in September.

Indicators from China suggest that a catch-up of iron ore with the model’s value is more plausible, according to the Oct. 20 report from Gersztein, as well as colleagues Michael Sneyd, Gustavo Mendonca and Samuel Castro. Conditional projections put prices at $80.30 for January and $76.60 for June, they said.

Spot iron ore with 62 percent content in Qingdao was at $62 a dry ton on Monday, according to Metal Bulletin Ltd., while the January SGX AsiaClear contract rose 0.4 percent to $61.66 in Singapore. Higher prices would benefit producers including Rio Tinto Group, BHP Billiton Ltd. and Vale SA.

While BNP is bullish about iron ore’s near-term prospects, others see the potential for weakness in 2018. Schroders Plc has warned that the raw material may sink back below $50 a ton next year as the effect of credit-led stimulus in China wears off and demand concerns resurface in the top user.

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