Here’s another sign the world isn’t coming to an end.
Prices of iron ore, a key industrial metal seen as a proxy for demand in the global economy, spiked by a record 17% on Monday. Analysts said it’s a reflection of confidence over China’s appetite for raw materials following a closely-watched government meeting in Beijing this weekend.
The iron ore surge isn’t a one-off blip. Since the beginning of the year, this key ingredient in steel has risen 54% to nine-month highs.
The rebound could be excessive, but it’s still the latest evidence of the global market’s better mood of late. Investors are realizing that fears of China leading the world into a recession were overdone. The global economy isn’t going gangbusters, but it’s not collapsing either.
“The rip in iron ore is nothing short of breathtaking,” Bespoke Investment Group wrote in a research report. “The strength in metals is something to behold and if they were to turn around, it would mark the end of a major stress on global equity and credit markets.”
Collapsing oil and industrial metals prices helped fuel the market freakout of early 2016. Commodity stocks tanked, putting pressure on the big banks that loaned these companies money during the boom years.
China fuels optimism
But the stock and commodity markets have calmed down over the past three weeks. The Dow is now up an incredible 1,600 points from its February 11 low.
Shares of Cliffs Natural Resources, a leading iron ore supplier, soared 19% on Monday. Brazilian miner Vale, another major iron ore company, jumped by 10%.
Metals watchers believe Monday’s iron ore surge was mostly fueled by optimism about the ability of China — easily the biggest consumer of iron ore in the world — to avoid a disastrous hard-landing of its economy. Chinese leaders met in Beijing on Saturday as the annual meeting of the National People’s Congress began.
Investors were encouraged by China raising its official budget deficit in order to fund tax cuts and spend more on infrastructure, Capital Economics said. For instance, China plans to ramp up rebuilding of homes for shantytown residents.
Cleaning up ‘zombie firms’
But China isn’t only talking about stimulus. Leaders spelled out efforts to clean up the gigantic supply glut by laying off workers and shutting down production. Just last week China said it expects to lose 500,000 steel jobs.
“Policymakers’ newfound willingness to acknowledge the existence of ‘zombie firms’ and admit they may require ‘bankruptcy liquidations’ and involve layoffs is, at the very least, a positive shift in language,” Capital Economics wrote.
That’s why Peter Boockvar, chief market analyst at The Lindsey Group, believes commodities have likely bottomed.
“The commodity complex and those countries impacted by it are the only area of true value that I see in markets as they’ve already gone through a vicious bear market,” Boockvar wrote in a note.
Is the rebound sustainable though?
The iron ore rebound is also being exaggerated by what’s known as “short covering.” That means investors who were betting prices would fall are panicking and buying to limit their losses.
“The rapid turnaround in sentiment has caught some people by surprise,” said John Kovacs, senior commodities economist at Capital Economics.
Even if metals have bottomed, analysts believe the rebound has been overdone. It’s not like the global supply glut can be erased overnight by China and few think global economic growth will suddenly accelerate.
“We don’t think this move up in iron ore is going to be sustainable. It’s outpaced any improvement we’ve seen in underlying fundamentals,” said Garrett Nelson, a metals and mining analyst at BB&T.