The unexpected and somewhat counter-intuitive iron ore rally that has seen prices rise to two-year highs can't entirely be blamed on speculation, analysts say.
As last year drew to a close, most analysts predicted the iron ore price would pull back from recent highs. Instead, the spot price has risen 6 per cent so far this year, peaking at $US83.65 a tonne on Tuesday, adding to an 80 per cent surge last year.
The move comes despite China's port stockpiles of iron ore sitting at record highs, as shipment levels continue to grow. Last year the country imported a record 1.02 billion tonnes of the bulk commodity.
"So many sophisticated traders and investors have been thrown off guard," said Philip Kirchlechner, the director of mining consultancy Iron Ore Research. "People have lost money because no one expected the price to hit $US80 again."
The reasons for the rise are difficult to disentangle.
Chinese steel mills made good profit margins last year, and expectations are that such margins will rise as China moves to close excess steel capacity this year. There may also be stockpiling going on in advance of the Chinese New Year, which formally starts on January 27.
Speculation may also play a role. UBS global commodity analyst Lachlan Shaw points out that Chinese investors are somewhat hemmed in by past expectations and government policy. The government has reintroduced housing purchase restrictions to try to limit the growth in house prices, and the horror experience in 2015 means many Chinese investors are reluctant to put their money into equities. Bank interest rates are not very attractive, and it's becoming increasingly difficult to invest outside China.
The government has tried to clamp down on speculative trade, last year dramatically increasing the fees and charges for engaging in futures contracts. But, Mr Shaw said, "perhaps people take the view that even though fees and charges to trade in futures are a lot higher than they were, they remain in a relative sense the most attractive place to invest and speculate".
Still, analysts on Tuesday played down the role of speculation, pointing to solid demand for the commodity as a key factor behind its resurgence.
"It's a relatively strong market," ANZ senior commodity strategist Daniel Hynes said.
The announcements of major projects, including increased railway spending, herald a greater demand for steel. On the supply side, major exports in Australia and Brazil have eased back from record production highs, although Brazilian miner Value on Tuesday shipped the first cargoes of iron ore from its new S11D mine in the Carajas region of Brazil.
Rio Tinto revealed on Tuesday it shipped slightly less iron ore in 2016 than it had forecast. There is also the possibility of disruptions to iron ore supply on the horizon because of a seasonally high risk of cyclones in Western Australia, which can explain some of the stockpiling.
Speculators, Mr Shaw added, were "not having a wild punt", but were taking in the fundamentals of the market to inform their views.
Commonwealth Bank mining and energy commodities analyst Vivek Dhar said restocking demand ahead of Chinese New Year appeared to be the main driver of this week's surge. "After that, we expect to see prices dropping off".
ANZ expected the price to hold in the high $US70s in the next few months. Macquarie Wealth Management was far more bearish, expecting demand to drop off in coming months in light of "clear oversupply" of iron ore in China. "We still believe our $US54 a tonne price forecast for this year is fairly balanced," Macquarie said in a research note on Friday.