China’s latest swipe at iron ore may be deja vu all over again

The slump in iron ore’s price on Monday would have had a familiar ring to market participants, coming in the wake of yet another attempt by China to cool what its officials see as an overheated market.

The question for the market is will Beijing’s efforts will bear fruit this time? Or is Monday’s slump just another blip and China is still unable, or unwilling, to take actions that will force iron ore prices meaningfully lower?

China’s economic planner, the National Development and Reform Commission, said on Monday it and the market regulator are jointly looking at the iron ore market and will crack down on hoarding and speculation.

The regulators said China, the world’s biggest importer of iron ore, will closely monitor spot trading prices and investigate malicious speculation in a timely manner. They will “strictly punish and disclose” irregularities such as hyping prices and hoarding, according to a statement.

The announcement had the desired effect of knocking the wind out of iron ore prices, with the most-traded September contract on the Dalian Commodity Exchange DCIOcv1 ending 8.8% lower on Monday at 1,121 yuan ($173.31) a tonne, a three-week low.

However, while the domestic price was hammered, the benchmarks traded outside China were less affected, although they still lost ground.

The spot price of iron ore for delivery to north China, as assessed by commodity price reporting agency Argus, dropped 6.3% to $205.75 a tonne, the lowest since June 7, but still up 29% from the end of last year.

The most active iron ore contract traded on the Singapore Exchange fell as much as 5.7% to $195.05 a tonne. That contract expires on July 31, however the June 30 expiry contract saw a more modest decline of 1.5% to end at $210.79 a tonne.

It’s worth noting that neither Chinese domestic futures nor the international price markers saw declines as big as the last time Beijing threatened a crackdown on iron ore, in mid-May, when trading limits and fees were raised.

At that time the spot iron ore price dropped 11% from a record $235.50 a tonne on May 12 to $209.05 on May 14, with the intervening day seeing no trade due to a public holiday in Singapore.

The spot price continued to drop in subsequent trading sessions, reaching a low of $188.50 a tonne on May 27, before resuming its upward trend to the recent peak of $223 on June 15.

Dalian futures fell 9.8% in the two days from the record high close of 1,315 yuan a tonne on May 12, and dropped to 1,021 yuan by May 27 before resuming their rally.

What the price action shows is that Beijing’s efforts to cool the iron ore market have an initial impact, but ultimately amount to little in the absence of structural changes in the market.

There are two sides to the iron ore and steel coin: Beijing is only really able to exercise control over the demand side, and it can really only do this by controlling the output of steel mills.

China indicated at the start of 2021 that it didn’t want steel production to exceed the record 1.05 billion tonnes achieved in 2020, partly to control energy consumption and pollution.

However, the reality after five months is somewhat different, with steel output hitting a record high of 99.45 million tonnes in May, and production in the first five months of the year reaching 473.1 million tonnes already – up 14% from the same period a year earlier.

Supply is the other factor, and it’s here that Beijing exercises virtually no control, being reliant on the volumes exported by the top shippers, namely Australia, Brazil and South Africa.

There are some signs that supply is returning to closer to potential, after weather events cut some volumes from top exporter Australia. Meanwhile number two exporter Brazil is still battling to contain the coronavirus pandemic, as is South Africa.

Australia exported about 76.59 million tonnes in May, according to vessel-tracking and port data compiled by Refinitiv, with this being the second-strongest month this year behind March’s 76.73 million.

Brazil shipped out 29.58 million tonnes in May, its best month since December’s 32.01 million and closer to the 32-34 million tonnes level the South American country is capable of exporting.

South Africa’s exports were 4.78 million tonnes in May, the second-strongest month this year.

Even with supply recovering, it’s difficult to envisage a situation where iron ore prices fall substantially – unless China actually limits steel production, or makes a meaningful shift to using scrap steel in electric arc furnaces rather than the more usual iron ore in coking coal blast furnaces.

Until then, it’s likely Beijing’s moves to lower prices will be a case of the renowned quote by U.S. baseball legend Yogi Berra: “It’s deja vu all over again.”
Source: Reuters (Editing by Kenneth Maxwell)

This article has been posted as is from Source

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