Quantitative Analysis /

Iron ore futures hit record high – reaching unsustainable levels

  • Iron ore futures hit US$215 per dry metric ton this week

  • Prices have increased 31% YTD and 145% over the past 12 months

  • Rally is likely to be unsustainable and there could be a sharp correction of up to 33% heading into next year

Iron ore futures hit record high – reaching unsustainable levels
James Huckle
James Huckle

Quantitative Analyst

Tellimer Research
13 May 2021
Published byTellimer Research

Source: Tradingview and Tellimer Research

Machine-learning forecast

Our machine-learning model forecasts a further run-up to US$231.16 over the next five months – representing a 7% increase from current levels. However, this is likely to mark the top of the current bull run. The model indicates a protracted correction, down to US$162.00, by April next year – representing a 43% drop from the forecast highs and 33% from current levels.

Unsustainable rally

The current move has diverted prices over 58% away from their average over the past year, representing the largest divergence on record. Any additional increase in this divergence will become unsustainable over the next 6 to 12 months, and will likely attract some profit-taking and, possibly, even short selling.

Divergence from rolling 1-year average price

Iron ore future divergence from 1-year average

Technical analysis

Both 2008 and 2011 put in significant cyclic highs around US$170-190 and both ultimately gave way to huge corrections of approximately -70% or more. The current 12-month spike-up has happened with such ferocity that it could be destined for much the same fate. Of course, these types of moves rarely turn on a dime, so timing the correction can be difficult.

The top of the expanding channel that encapsulated much of the price movement from 2015 to 2020 will now act as support to any sizable retracement between 30-35% from current levels, and could even act as a launchpad from which a longer multi-year trend could be built.

Iron ore and steel correlation

The current 1-year pairwise correlation between iron ore and steel is 91%, which is about as tight as any correlation found in finance. It is very close to its record of 92%, set in 2015.

Rolling 1-year correlation between iron ore and steel rebar

Iron ore and Steel correlation