SINGAPORE – Iron-ore’s in very unfamiliar territory. As China presses home its campaign to curb steel production, some investors are starting to wager that after a chill in winter, a torrent of pent-up demand will spur a springtime rebound in a move that’s shifted the shape of the futures curve.

On the Dalian Commodity Exchange, deliveries in May are now more costly than nearer-term supplies for January, reversing the typical pattern that’s held true for months. The new market structure is known as contango, and for iron-ore investors it’s an unusual sight.

“This is probably the first or second time we’re seeing a contango,” Dang Man, a steel analyst at Chinese brokerage Maike Futures Co. in Xi’an, said by phone. “Speculation about demand recovery, which could drive a flurry of restocking activity by steel mills, has pushed the May price above that of January.”

FIGHT POLLUTION
Iron-ore prices have retreated for the past two months on expectations steel output cuts in China to fight pollution over winter will sap iron-ore consumption just as miners add output. At the same time, producers and investors are peering forward into 2018, pondering what’ll happen to supply, demand and prices when the curbs are relaxed. Deutsche Bank and Credit Suisse Group are among banks that have suggested demand may snap back.

“The forward curve has gone into contango for the first time in a very, very long time,” Nev Power, chief executive officer of Australian miner Fortescue Metals Group, said in an interview. “It is very significant intervention, to put these restrictions on,” he said, referring to the curbs, adding: “I think there’ll be significant pent-up demand to come after winter.”

ALL CHANGE
On Wednesday, futures for January delivery – currently the most-active in Dalian – were at 433.5 yuan a metric ton, while the May contract was at 457 yuan, a premium of 23.5 yuan. A couple of weeks ago, on October 19, the pair were almost at parity. Go back to the start of September, and the May contract languished at a discount of more than 20 yuan.

China’s steel cuts are likely to create seasonal price swings in iron-ore, Deutsche Bank said in an October report in which it predicted “a strong pick-up in demand in spring.” While the bank sees benchmark iron-ore with 62% content at $55 in the first quarter, the forecast for April to June is $70. The spot price was at $58.52 a dry ton on Tuesday, according to Metal Bulletin

There are similar observations from Credit Suisse. Steel demand that’s been temporarily subdued could emerge in the first half of 2018, “surprising the market on the upside,” analysts Yang Luo and Peter Li said in an October 31 note.

In Singapore, SGX AsiaClear iron-ore futures paint a different picture as the forward curve is almost flat through to mid-year, then slopes downward – with longer-dated prices lower than nearer ones in a pattern known as backwardation. Unlike Dalian – where investors’ positions are clustered in every fourth month, with concentrations in January, May and September – positions in Singapore are more evenly spread.

Maike’s Dang said the unusual contango structure in Dalian suggested the impact of China’s curbs have been overplayed, and it will probably be short-lived. She added while the Singapore curve has flattened, it’s not about to flip: “I don’t expect a similar structure to be duplicated in the SGX contracts.”