(Andy Home is a Reuters columnist. The opinions expressed are his own)
By Andy Home
LONDON, April 19 (Reuters) - It's been a wild, wild week for the commodity markets.
Events in the gold market have been nothing short of apocalyptic. The shiny one's bull story has vaporised in the space of a few days.
Copper has experienced its own bull capitulation, the red metal collapsing to levels last seen in 2011.
So too have most of the other industrial metals traded on the London Metal Exchange (LME), the degree of damage mitigated only by pre-existing price weakness in the case of aluminium, zinc and nickel.
Oil is back under $100 per barrel and global stock markets are now also looking decidedly shaky.
It's hard not to think that we are experiencing a collective reset of expectations about the global macro picture, one in which growth is downgraded and the fear pendulum flips from inflation to deflation.
What then to make of iron ore, that other great bellwether of the global industrial economy?
The price of benchmark seaborne iron ore <.io62-cni> has done no more than give up a couple of dollars over the last week, the gentlest of ripples compared with storm waves that have crashed through other markets.
It is a positive contrarian signal or merely a curious anomaly?
MARKET MECHANICS
Wildness in markets is often as much about mechanics as triggers.
Take gold, for instance.
You don't need to be an analytical guru to understand why something very bad was likely to happen if the spot gold price broke down through the $1,530 per ounce level.
Pull up a weekly chart and the significance of that price region leaps out. It defined key market bottoms in February 2011, January 2012 and (repeatedly) in May-June 2012.
Almost certainly, therefore, there were strata of stop-loss positions enveloping that key chart point.
So when, to quote Standard Chartered Bank, "some major hedge funds (were) looking to test the resilience of the bull story in gold", they would have known only too well that if they could force a breach of $1,530, the market's own mechanics would kick in to accelerate the process.
Once they did, the contagion spread to the likes of copper via another hidden lever, margin calls. Distressed gold longs liquidated other positions in a desperate attempt to stay in the game.
LME copper's own swoon to $6,800 on Thursday was down to another opaque accelerator, options positions.
As the copper price fell, those short of put options were compelled to sell to cover their exposure, particularly against a fresh tranche of $6,500 September puts bought presciently by a fund at the start of the week.
It is the very nature of such "gamma" hedging that it goes into reverse on any correction, generating precisely the sort of up-down volatility seen on Thursday.
Such mechanics are still largely lacking from the iron ore market, which is only tentatively moving into the world of futures and options.
Moreover, it is largely still resilient to contagion from other markets. Not many, if any, gold speculators, even the biggest houses, would have had long positions in the iron ore swaps market.
Iron ore is quite capable of generating its own volatility but when it happens, such as in the third quarter of last year, the causes tend to be physical.
This is because it is a market still defined by physical drivers, the appetite of China's steel mills for spot cargoes and producers' ability to satisfy that appetite.
PHYSICAL DRIVERS
Both drivers are still running positive for iron ore.
Chinese steel production rose by just over 10 percent in the first three months of this year.
The sector had already aggressively destocked, which is why the iron ore price collapsed late last year, meaning that mills still have to buy, even if hand to mouth, to ensure they can maintain run rates.
Iron ore producers, meanwhile, or at least the biggest producers, are still struggling to meet that demand.
The "big three", namely Vale, Rio Tinto (Xetra: 855018 - news) and BHP Billiton (NYSE: BBL - news) , managed to record collective annual production growth of just 1.4 percent in the first quarter.
The first quarter of any year is a weak production period for all three, reflecting the disruptive effects of the rainy season in Brazil and the cyclone season in Australia.
Actually, the latter was less severe this year than in previous years. Both Rio and BHP managed to increase production year-on-year by 4 and 6 percent respectively.
Vale, however, saw production slide by 3.5 percent with the usual rains compounded by operational issues at some mines and problems with permitting mine expansions.
The net result was that the biggest, lowest-cost suppliers of iron ore to the Chinese market could not match the 10-percent implied demand growth in the first quarter.
The gap (NYSE: GPS - news) between what the "big three" could supply and what the Chinese market needed meant that other, higher-cost producers, particularly in China itself, had to be incentivised to fill it.
Iron ore, in other words, is still in essence a deficit market.
Compare and contrast with copper, that other great deficit market of recent years.
The price of copper was steadily eroding even before this week's "flash crash" as the market watched surplus metal pour into LME warehouses at a rate not seen for many years.
APOCALYPSE TOMORROW
None of which means that iron ore prices are not going to experience their own day of reckoning at some stage.
Everyone knows that more iron ore supply is coming. Both Rio and BHP are bringing on more capacity this year and, as both reminded us in their Q1 reports, those expansions are currently running to time and to budget.
On the other side of the equation, Chinese steel mills may be expanding production at a 10-percent pace but no-one believes that actual Chinese consumption is running at that sort of growth rate.
The result is a build in steel products and, as that inventory starts to weigh on Chinese steel futures, a renewed squeeze on profit margins in the sector.
More iron ore supply, high end-product stocks and a possibly unsustainable rate of steel production do not a happy combination make.
But this is a scenario of apocalypse tomorrow not apocalypse now.
Right now, there is still sufficient raw materials demand in China to cushion the iron ore price.
And there is still enough industrial growth around, both in China and elsewhere, to cushion other industrial metal prices.
Chinese copper buyers have predictably been on a bargain-basement buying spree over the last few days.
It's not evident in the outright price yet but it is certainly evident in local physical premiums, which have shot up as mainland buyers tap stocks in Shanghai's bonded zone.
The likes of aluminium and zinc, meanwhile, have seen heavy and consistent consumer forward buying over the last week, which is why prices have stabilised even as the carnage in other markets continues.
This commodities rout has represented a speculative bull capitulation, accentuated and accelerated by market mechanics, not the evaporation of global manufacturing activity.
So is the tranquility in the iron ore price a micro anomaly or a contrarian macro signal?
The answer is a bit of both.
An anomaly because the iron ore market does not yet have the scale of speculative involvement that can be routed by the sort of bear attack seen in gold. Nor the market mechanics that can allow such an attack to be self-acclerating.
A contrarian macro signal because China, the engine-room of the iron ore market, as it is of all industrial metals demand, is still ticking over sufficiently fast to absorb what the rest of the world can throw at it.
When that changes, you'll know because the iron ore price will say so. (Editing by Alison Birrane)
