LAUNCESTON, Australia (Reuters) – Monday’s iron ore price collapse would have sounded familiar to market participants as a result of another attempt by China to cool what authorities believe is overheated.
The question for the market is whether Beijing’s efforts will bear fruit this time around? Or is the slump on Monday just another spike and China is still unable or unwilling to take measures that will significantly lower iron ore prices?
China’s economic planner, the National Development and Reform Commission, said Monday that it and the market regulator will be jointly investigating the iron ore market and taking action against hoarding and speculation.
Regulators said China, the world’s largest importer of iron ore, will closely monitor spot trading prices and investigate malicious speculation in a timely manner. They will “severely punish and disclose” irregularities such as price hype and hoarding, a statement said.
The announcement had the desired effect of taking the wind out of the sails of iron ore prices. The most traded September contract on the Dalian Commodity Exchange ended Monday 8.8% lower at 1,121 yuan ($ 173.31) a ton, a three-week low.
However, while the domestic price was depressed, benchmarks traded outside of China were less affected, although they were still losing ground.
The spot price for iron ore for delivery to northern China fell 6.3% to USD 205.75 per ton, according to estimates by the commodity price reporting agency Argus, the lowest level since June 7, but still 29% higher than at the end of last year .
The most active iron ore contract traded on the Singapore Exchange even fell 5.7% to USD 195.05 per ton. This contract expires on July 31st, but the contract that expires on June 30th saw a more modest decline of 1.5%, ending at $ 210.79 per tonne.
It’s worth noting that neither Chinese domestic futures nor international price markers saw the last time Beijing threatened crackdown on iron ore in mid-May when trading limits and fees were raised.
At the time, the spot iron ore price fell 11% from a record $ 235.50 per tonne on May 12th to $ 209.05 per tonne on May 14th, with no trading on the day in between due to a holiday in Singapore.
The spot price continued to fall in subsequent trading sessions, hitting a low of $ 188.50 per tonne on May 27, before resuming its upward trend to a recent high of $ 223 on June 15.
Dalian futures fell 9.8% in two days from a record high of 1,315 yuan per tonne on May 12 and fell to 1,021 yuan by May 27 before resuming their rally.
What the price trend shows is that Beijing’s efforts to cool the iron ore market are beginning to have an impact, but ultimately make little difference without structural changes in the market.
The iron ore and steel coin has two sides: Beijing can only really control the demand side, and only by controlling the production of steel mills.
China announced in early 2021 that it does not want steel production to exceed the 2020 record of 1.05 billion tons, partly to control energy use and pollution.
However, the reality after five months looks a little different: steel production reached a record high of 99.45 million tons in May and production in the first five months of the year already reached 473.1 million tons – an increase of 14% over the same One year earlier.
Supply is the other factor, and here Beijing has virtually no control as it relies on the export volumes of the top shippers, namely Australia, Brazil and South Africa.
There are some signs that supply is moving closer to potential again after weather events cut some volumes from top exporter Australia. The second exporter, Brazil, is still fighting to contain the coronavirus pandemic, as is South Africa.
According to ship tracking and port data compiled by Refinitiv, Australia exported around 76.59 million tonnes in May, with that being the second busiest month this year after 76.73 million tonnes in March.
Brazil shipped 29.58 million tons in May, the best month since December at 32.01 million tons, and is approaching the 32-34 million tons the South American country can export.
South Africa’s exports totaled 4.78 million tons in May, the second busiest month of this year.
Even if supply rebounds, it’s hard to imagine iron ore prices falling significantly – unless China actually cuts steel production or makes a sensible switch to using steel scrap in electric arc furnaces instead of the more common iron ore in coking coal furnaces.
Until then, Beijing’s move towards lower prices is likely to be a case of the famous quote from US baseball legend Yogi Berra: “It’s deja vu all over again.”
The opinions expressed here are those of the author, a columnist for Reuters.
Edited by Kenneth Maxwell