(Refiles to fix typo in paragraph one)
--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Jan 11 It's no surprise
that iron ore is the current commodity market darling, given
record Chinese imports, a jump of 82 percent in prices in just
four months and a huge storm about to hit a major mining region.
But behind these strong fundamentals is a technical picture
showing the steel-making ingredient is heavily overbought and
likely to decline in the next few months.
It's always tempting to dismiss technicals in the face of an
opposing fundamental picture, but an analysis of the recent
history of iron ore prices shows they have been accurate in
reflecting turning points.
Asian spot iron ore .IO62-CNI=SI has retreated slightly
from a 15-month high of $158.50 a tonne hit on Jan. 8 and closed
on Thursday at $158.20, having rebounded from a three-year low
of $86.70 hit last September.
This has been driven by robust Chinese imports, which
climbed above 70 million tonnes for the first time in December,
as steel mills restocked on the back of a brighter economic
outlook for the world's largest commodity buyer.
The solid demand outlook comes as Cyclone Narelle bears down
on Western Australia, home to the bulk of mines operated by
world number two and three producers Rio Tinto and BHP
While the category four storm, the second-strongest type,
will help keep prices buoyant in the short term as the market
frets about supply disruptions, this will only serve to make
iron ore appear more technically vulnerable.
Iron ore swaps in Singapore normally trade in a
mild backwardation and deviations from this generally herald a
change in the direction of prices.
Currently the market is in steep backwardation, with the
front-month contract commanding a substantial premium over those
for later delivery.
By 11:10 a.m. in Singapore, the front-month contract was at
$150.06 a tonne, 14 percent higher than the six-month contract
and 19.5 percent above the 12-month.
This is a steeper backwardation than was in place just prior
to iron ore's two previous sharp declines in price.
On Sept. 7, 2011, the front-month contract was 6 percent
above the six-month and 14 percent higher than the 12-month. In
the following seven weeks iron ore tumbled 35 percent.
A bigger decline of 42 percent was recorded in the five
months from April 13 last year, when the front-month contract
was 5 percent higher than the six-month and 10 percent above the
The shape of the curve also helps point to rallies, showing
this analysis is a good indicator of likely price movements.
Just prior to the surge that started last September, the curve
was in an extremely rare contango, where prices for future
months were above those for immediate delivery.
The Relative Strength Indicator is also pointing to iron ore
having rallied too hard in recent months.
It was 94.189 on Jan. 10, with a level above 70 indicating
overbought conditions and a reading below 30 showing oversold.
In September 2011, the RSI peaked at 81.38 and in April last
year it reached 84.3.
Both times it plunged to well below 30 after reaching the
peaks, bottoming at just 1 in October 2011 and 3.95 in September
The RSI has been above 90 on four occasions prior to the
current occurrence since iron ore swaps started trading in 2008,
and three of the four times has been followed by a drop to
levels below 30, with an accompanying fall in prices.
What the forward curve and the RSI are showing is that the
risks of a fall in iron ore prices is mounting, and while
positive fundamentals may be able to stave this off for a while,
the track record suggests technicals will win the day
(Editing by Clarence Fernandez)