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China bulls chase iron ore 25% higher in just two weeks

The drop comes amid a serious overcapacity problem in the electrolytic aluminum industry

Iron ore prices continued its strong rally on Tuesday, adding $4.50 or 4.3% to $109.60 a tonne after a record-setting 5.7% jump on Friday according to data supplied by SteelIndex.

Benchmark 62% iron ore fines at China’s Tianjin have now clawed back more than 25% of its value since hitting a three-and-a-half year low of $86.70 two weeks ago. This time last year the commodity was trading at $175 a tonne.

Iron ore’s bounce comes after the Chinese government approved a raft of new building and rail projects worth 1 trillion yuan ($157 billion) early September in a concerted effort to boost its slowing economy – the fortunes of the steelmaking ingredient have been increasingly tied to Chinese investment in infrastructure.

The rally in iron ore has spilled over into shipping. Bloomberg reports for the first time this year, rates charged by dry bulk carriers capable of carrying 160,000 tonnes dead weight will be more than the cost of operating them.

The annual seaborne iron ore trade is roughly 1 billion tonnes and more than 60% of the commodity ends up at Chinese ports. Investment bank Morgan Stanley forecast the iron trade to grow 14% in 2013 – three times the rate of expansion predicted for this year.

Not everyone is convinced the rally is sustainable though. quotes Colin Hamilton, a commodities analyst at Macquarie, an investment bank, in London as saying: “It’s a big turning point in sentiment rather than a turning point in demand”.

Bloomberg quotes Jim Chanos of hedge fund Kynikos Associates and inveterate short-seller, speaking about the recent rally in commodities as saying “structurally, until China really addresses this credit-driven infrastructure and fixed-asset investment model, the surprises are going to be on the downside.”


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