The recent rebound in iron ore prices has prompted another attempt by Chinese authorities to curb speculative activity.
Over the weekend, China’s key economic planning body, the National Development and Reform Commission (NDRC), said it would “pay close attention” to changes in the iron ore market.
In a statement on the 11th, the agency said, “We will thoroughly crack down on illegal activities such as fabricating and distributing price increase information, hoarding, and overcharging, so that the iron can be operated smoothly.” The ore market.”
It said it instructed “relevant information companies” before disclosing market and price information and reminded them to carefully check and ensure accuracy.
The NDRC’s intervention was against the backdrop of soaring iron ore prices. Iron ore prices have risen from $11 per ton to more than $122 per ton since the beginning of the year. Iron ore recently traded as low as $80/ton in November.
Prices surged as China ditched the severe “COVID zero” response to the pandemic it adopted in 2020 and reopened its economy.
Whenever iron ore prices rose significantly, authorities called in local mills and merchants and received stern warning that their actions were being scrutinized.
Despite the wave of infections and deaths China is currently experiencing, a dramatic reversal in COVID-19 policy has fueled optimism that an economy thought to have grown at less than 3% last year will become the second-lowest growth rate. Almost half a century from 2.3% in 2020 when the pandemic first hit – now it’s about to rebound sharply.
Chinese authorities have prioritized stimulating domestic demand to support the recovery while taking steps to support the sluggish real estate sector. They are considering issuing record levels of local government bonds to spur infrastructure investment, along with broader fiscal and monetary policy.
Last year, China, which accounts for about 70% of world maritime iron ore trade, produced about 1.11 billion tonnes of steel, down about 1.5% from 2021 levels. This reflects declining levels of domestic activity and exports year over year. Exports increased by 7% year over year, but declined by 9.9% in December.
Greater infrastructure spending, more activity across the broader economy and a recovery in the real estate sector will quickly drive more iron ore demand from Chinese mills, sending prices skyrocketing.
China’s mixed economic blessing to the rest of the world
The NDRC’s latest attempt to eradicate what it considers illegal activity in the iron ore market is not the first. In fact, whenever iron ore prices have risen significantly, authorities have asked local mills and traders to issue stern warnings that their actions are being scrutinized.
The weekend announcement was the second this year, with the agency warning the industry at the beginning of the year that it was deeply concerned about price fluctuations and rising prices, which it described as “clearly speculative”.
While rising iron ore prices are clearly linked to expectations of an economic rebound and likely growing demand for iron ore, Chinese officials have an innate market mistrust.
A more substantial effort to intervene in the market is underway and could have an impact this year. Last year, China set up a new entity called China Mineral Resources Group (CMRG) to negotiate iron ore purchases on behalf of about 20 of China’s biggest steelmakers.
It’s an attempt to counter what China sees as excessive market dominance by Rio Tinto, BHP and Brazil’s Vale, the three largest producers of offshore iron ore. Another large iron ore exporter is Fortescue Metals.
CMRG intends to act as a single desk, consolidating the purchasing of factories and using its purchasing power as leverage against producers.
It will also manage China’s offshore iron ore investments, including Guinea’s massive Simandou project. Capable of entering production by the end of the decade, Simandou has the potential to produce around 100 million tonnes of high-quality ore.
It is questionable how effective consolidation of the purchasing power of major sawmills will be.
China’s steel industry is highly fragmented with more than 500 participants. The top 10 producers, which will provide the core for CMRG demand, account for approximately 40% of total iron ore imports.
Iron ore producers have their own leverage, given that four of the iron ore producers dominate maritime trade and are at the lower end of the industry cost curve, with Rio, BHP and Vale in particular at the upper end of the industry quality curve. China’s domestic iron ore producers are key marginal producers that effectively provide a basic reference point for pricing.
Since the shift to market-based pricing, significant investments have been made by producers to increase supply to meet China’s soaring demand. Africa
China’s hope is that by concentrating the purchasing power of its major sawmills, it can extract market price discounts from large producers. This will only happen if allowed by major producers Rio, BHP and Vale.
Miners have experience in the past in regular price negotiations with government-sponsored negotiators.
Producers held annual negotiations with the largest Japanese and Chinese mills until 2010, when BHP’s Marius Kloppers led the shift to index-related market pricing. It does not properly reflect the balance of supply and demand.
Since the shift to market-based pricing, producers have invested heavily in increasing supply to meet soaring demand in China, along with dramatic cost reductions that are an indicator that the market is functioning normally.
Producers won’t want to go back to any system similar to the pre-2010 model, and for the next few years at least, China is shielded by the reality that there are no alternative competing sources large enough to undermine their industry. location.
What NDRC and CMRG can achieve is some reduction in price volatility, especially if CMRG can build its own ore inventory.
That could undermine purely speculative activity, and indeed, one would assume that the CMRG has the sophistication to manage its role effectively and efficiently and not simply add another layer of bureaucracy to a commodities market that has generally functioned well. can be suitable for both factories and producers. It has been about 10 years since it has been transformed into a real market.