Unlike the turbulence being experienced by many other commodities, iron ore prices have snoozed through the past seven months, staying locked in a narrow range.
A shift in China's winter pollution abatement strategy could cause iron ore prices to awaken, but it's far from clear as to which way they may break.
China's Ministry of Environment and Ecology issued its anti-pollution plan last week, allowing local authorities to adopt measures based on regional emissions levels rather than imposing blanket output curbs on heavy industry.
At first this was seen by the market as a loosening of strict air quality rules, the result being that heavy industries such as steelmaking wouldn't face output curbs as severe as they did last winter.
This would mean that steel mills could continue to operate at high rates over winter, potentially creating a surplus of the metal at a period of traditionally slack demand.
Certainly, investors in steel took this view. Benchmark Shanghai rebar dropped to 3,942 yuan ($US574.63) a tonne on Sept. 28, down 2.8 per cent from the previous day's close, which came before the ministry announced its plans.
However, there is now some uncertainty as to what the change in policy will actually mean, and how local authorities will implement their emissions targets.
Barclays Bank analyst Ian Littlewood said in a note received on Friday that the bank's view is that the market is underestimating the impact China's emissions cuts will have on steel and iron ore.
"They will be more stringent as they cover more capacity over a wider area, in our view," Littlewood said.
If this thinking is on the money, it means that more of China's steelmaking capacity will face some form of restrictions this winter, rather than just those mills based in northern provinces more prone to pollution and smog.
While there may be some overall loosening of output curbs across heavy industries, what restrictions are put in place will affect more steel mills, thus reducing overall production.
In this scenario it's likely that steel mills will seek higher-grade iron ores, such as ore with 62 per cent iron content and above, while lower grade material will become more deeply discounted.
This is what happened last winter, when higher-grade ores outperformed those with lower quality.
Iron ore with 62 per cent content, as assessed by Argus Media, ended last week at $US68.85 a tonne. There have been no price assessments this week given China's long holiday break.
This means that 62 per cent ore is at a premium of $US12.85 a tonne, or 23 percent, to 58 per cent ore.
The premium of 62 per cent ore over 58 per cent has been more or less consistent in percentage terms since the winter price peak in February.
However, iron ore with 65 per cent iron content has continued to command a hefty, and widening premium over the other grades.
Iron ore prices peaked last winter on Feb. 26, with 65 percent ore reaching $96.25 a tonne. At the time this was $US31.60, or 49 per cent, more than the 58 per cent grade, and $US16.36, or 20 per cent, higher than 62 per cent iron ore.
Currently, 65 per cent ore is 71.3 per cent more expensive that 58 per cent, and 39.3 per cent higher than 62 per cent ore.
What the pricing shows is the premium for the higher-grade iron ore has been widening over mid- and low-quality - a trend that may accelerate if China does indeed produce less steel this winter than it did last winter.
However, if the opposite is true, and the winter pollution curbs aren't as severe as last winter, then it's likely that mills will be happy to continue using 62 per cent ore, and perhaps even the 58 per cent.
Which way the various grades of iron ore are likely to move won't become apparent until there is more clarity on exactly what output restrictions are going to be imposed by the local authorities.
--by Reuters columnist Clyde Russell