Shorts Pulverized: Iron Ore Soars Most On Record After Goldman Says "Bearish Case Intact"

Tyler Durden's picture

Goldman does it again.

Just hours after the central banker-spawning investment bank issued a report in which it said the iron ore rally is likely to be short lived "in the absence of a material increase in Chinese steel demand, and steel raw materials will once again drive steel prices rather than the other way around", overnight Iron Ore futures traded on the Singapore SGX exploded as much as 19% higher to $58.95 in one session, its biggest jump on record.

 As seen in the chart below, the one day squeeze has been the most violent in years in trading. It probably goes without saying that with the market suddenly offerless, there has been virtually no actual volume as bids scramble to catch whatever asks they can find, in the process crushing whoever was short the commodity and unleashing countless margin calls.

 

The euphoria was also matched on China's Dalian Commodity Exchange where Iron Ore soared limit up to $62.47/mt - the highest in six months.

 

On Monday, steel in China also rose by the daily limit, with steel reinforcement bar for May up 5 percent to 2,073 yuan a ton on the Shanghai Futures Exchange, and hot-rolled coil climbing the same amount to 2,256 yuan a ton.

The catalyst for the move was confusing: on one hand Chinese policy makers signaled their willingness to buttress growth in the ongoing People's Congress, while on the other authorities reiterated pledges to cut excess industrial capacity, including in steel, and implement reforms, in what are clearly contradictory promises. It is clear on which side of the this "contradiction"  the market stands, if only for now.

As Bloomberg notes, iron ore has advanced in 2016, countering expectations it would see further losses on mounting low-cost supply from Australia and Brazil and weakening demand for steel in China, which accounts for about half of global output. At the annual National People’s Congress at the weekend, authorities said they’d allow a record high deficit and higher money-supply target to support growth of 6.5 percent to 7 percent. The nation will also subsidize cuts to excess capacity in industries such as steel.

All of this means that China is back to its old, broken model which led China to the edge of the hard landing from which it is desperately trying to pull itself up from, and it will do so by unleashing all the same policies and debt-binge that put it here in the first place.  That should also answer questions about just how sustainable this rally truly is, apart from the technicals where the shorts have gotten pulverized.

Meanwhile, however, stocks are loving it with miners’ shares such as Australia’s Fortescue Metals rocketing higher by 24 percent. Steelmakers’ shares rose in China on Monday, with Baoshan Iron & Steel Co. up as much as 9.7 percent in Shanghai. Angang Steel Co. gained as much as 5.2 percent in Hong Kong, while Maanshan Iron & Steel rose 6.5 percent. In Australia, Rio -- which said last week it expected the global supply of seaborne ore to outpace demand growth in the near term -- gained 3.5 percent to the highest since December. BHP Billiton Ltd., which has forecast the raw material will probably extend declines to find a level well below $50, was up 5 percent.

Iron ore’s upswing this year has accompanied a revival in other commodities including oil and base metals such as copper. State efforts to cushion the loss of steel capacity in China, including helping retrenched staff, may help to improve the profit margins at mills that remain by reducing competition.

* * *

So to all those who listened to Goldman which just yesterday said the "Bearish case remains intact", and pressed their shorts: our condolences.

This is what else Goldman's Christian Lelong and Amber Cai said overnight.

Market roundup

Iron ore rallied 9% wow to US$53.50/t, a pace that flat and long steel prices failed to match with 5% and 2% wow increases respectively. On the demand side, the Chinese government announced a gradual deceleration in the economy and a modest increase in the fiscal deficit for 2016. Meanwhile, a recent tax cut on transactions should support property sales. On the supply side, up to half a million steel workers may be reallocated to other sectors in an effort to reduce overcapacity in the steel industry. Metallurgical coal also participated in the rally, rising 3% wow to US$79/t at a time when negotiations for the next quarterly benchmark prices are due to start. In spite of this relatively modest bounce in the seaborne market, 7.8Mtpa of production capacity has been flagged for closure since the start of the year. The US$420m proposed sale of the Buchanan mine in the US would indicate that premium assets are finally being offered after four years of price declines.

* * *

Spot iron ore prices have rebounded strongly from their recent low in mid-December. The contrast between a 24% ytd price rally and the previous period of mine closures and production cuts raises the following questions:

Q1: What has been driving this rally?

Steel prices should reflect the cost of raw materials and the level of industry profitability but the causal relationship between the two commodities can sometimes be reversed. In our view, steel prices have rallied because the market was in deficit and better margins were required to increase production ahead of the peak demand season. This mean reversion in steel margins happened to coincide with an unexpected increase in Chinese total social financing (TSF) for the month of January that fueled expectations of higher construction activity for 2016.

Q2: How is this rally likely to evolve?

The profitability of steel mills is the key indicator to watch, in our view. Higher steel prices encourage idled blast furnaces to incur start-up costs and resume production, but this window of profitability is currently at risk because of rapidly rising iron ore prices and a persistent mismatch between steel-making capacity and Chinese demand.

Q3: Why are we still bearish on iron ore?

We expect the current rally to be short-lived in the absence of a material increase in Chinese steel demand, and steel raw materials will once again drive steel prices rather than the other way around. The price signal to shut down marginal supply ex-China has been turned off temporarily but seaborne demand has essentially peaked and the stream of announced production cuts is bound to resume in the months ahead.

* * *

We have no doubt that Goldman will be right... in the months ahead. In the overnight session, we can't help but feel sorry for anyone who decided to trade on Goldman's reco and short ahead of today's move.

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fockewulf190's picture

May see a spike up in Go-Fund-Me sob stories any day now.

StackShinyStuff's picture

Well the idiots should have been reading ZH and known to do the opposite.  Muppets will never learn.

VinceFostersGhost's picture

 

 

Yeah....read ZH and get added to the terror watch list.

 

No thank you.

philipat's picture

Funny how this never happens with prescious metals isn't it?

NoPension's picture

Go out there and manipulate.

....turn those fucking machines back on ! Mortimer.......Mortimer!!!!

The fundamentals say oil should be at least $60 a barrel, because that's what it takes to make a profit and to keep your socialist economy running.
...so, go make it so.
What are we going to use for fuel, olive oil?
Charge them anything, they will still buy it.

Tao 4 the Show's picture

ZH has shown this hilarious pattern of GS advice and Muppet slaughter over and over again. It never a fails to make me laugh. Does anyone have a rough sense of how often it happens? Can their clients actually be so idiotic as to be fleeced on every call?

Gregory Poonsores's picture
Gregory Poonsores (not verified) Tao 4 the Show Mar 7, 2016 6:18 AM

Yet ZH are happy to present GS as credible on the occasions it suits their narrative on a particular issue.

i_call_you_my_base's picture

They probably give their bigger clients opposing advice, and they may even know the game.

Oldwood's picture

The "special: investors...the market makers, are desperate for a return...any return, so will settle for any short run bubble as a means to harvest a few coupons. As the economy tightens up I'm sure we will see more and more of these irrational ramps that ultimately collapse. We know there is no real ramp in demand for oil, copper, Iron or much of anything else. Those with enough combined firepower to initiate an algo driven run up will keep doing it as it is quick easy money, and requires no real human rational response as it has all already been programmed into the algos who do the real buying.

Get out and stay out. You can't end corruption through participation, you can only end it by abandoning it, but those addicted to money for nothing will stay in as there is NO other place to go short of outright criminal interprises.

NoPension's picture

Pump....

..and..

DUMP.

" tell him Mortimer, what the best part is. Whether our customers make money or lose money, we still get paid for the trade!"

Kokulakai's picture

Anyone care to venture a guess which side of this trade goldman was on?

Two terms for politicians.
One in office, and one in jail.

die standing's picture

(in a far off server room somewhere)

"ok now twist that knob marked IRON ORE clockwise on 3.. 2.. "

devo's picture

Anyone who listens to Goldman deserves it when they get their face ripped off.

Rigger's picture

Has no-one made the 5x leveraged, inverse Cramer, Gartman & Goldman yet? It would be the best performed fund to ever operate...

Crisismode's picture

 

 

Sing me up for that one!

I'm all in the day it's registered.

 

Late onset ADHD's picture

gotta' love those yummy...

carrots hanging from a stick...

 

do muppets like carrots?...

Rob3rto's picture

The initial play is usually to fade Goldman, especially when their reports make it onto ibc http://ibankcoin.com/flyblog/2016/03/07/goldman-says-the-iron-ore-steel-...

Davidduke2000's picture

The demand of course is not improving, but speculators that work in groups are playing with the market.

They look for beat up areas and send it to the stratosphere cleaning up on the way then sells what they bought to short interests and this game keep playing over and over.

The same thing happened in 1928 and early 1929 just before the market crash, as stocks were so high they could no longer make profits.

leaklover's picture

Shouldn't the title be: "ZERO HEDGE SHORTS PULVERIZED" ?

Theonewhoknows's picture
Theonewhoknows (not verified) Mar 7, 2016 12:55 PM

Temporary. So let's go back to the facts : We are already seeing economic collapse starting to unravel. With Commodities being cheapest since 1974 and developing economies heavily indebted - (normally they are the ones that always save the day during crises as they are using cheap resources to manufacture and save world demand) - China will not be there to save the day... 

(source: independenttrader.org/commodities-cheapest-since-1974.html)