China-Australia relations: Australian miners not to blame for soaring iron ore prices, observers say
- China Iron & Steel Association says ‘market pricing mechanism has failed’ after commodity price hits record US$158 per tonne on Thursday
- ‘Prices have soared in recent weeks in response to a significant fall in iron ore arrivals at Chinese ports,’ commodities analyst says
Australian miners should not be blamed for galloping iron ore prices that were likely caused by excessive “hot money” speculating on iron ore derivatives, analysts say.
The iron ore market pricing mechanism has failed
“The iron ore market pricing mechanism has failed and steel companies unanimously call on the State Administration for Market Supervision and the China Securities Regulatory Commission to take effective measures … and crack down on possible violations of regulations,” CISA said in a statement.
BHP confirmed its production remained strong and there had been few weather interruptions to its operations.
Atilla Widnell, managing director of commodities analyst Navigate Commodities said there had been market concerns over slowing shipments of iron ore in China, which were worsened by Rio Tinto’s potential slowdown in production after blowing up an Australian aboriginal cave.
There had also been cyclone threats to the Australian iron ore mining capital of Pilbara in Western Australia, but while a downward adjustment in supply could put up prices it was not enough to send prices “spiralling” like they had been in the past few weeks, he said.
On Thursday, the price of iron ore reached a record high of US$158 per tonne on the Platts 62 per cent iron ore index. Earlier in the year they had mostly fluctuated between US$70 and US$80 a tonne, and during previous downturns had fallen to as low as US$50.
Prices have soared in recent weeks in response to a significant fall in iron ore arrivals at Chinese ports
“Prices have soared in recent weeks in response to a significant fall in iron ore arrivals at Chinese ports,” Widnell said.
“That said, we believe [price] benchmarks were overinflated to begin with given that large volumes of hot money have filtered through into iron ore as a speculative play on future economic growth creating a disequilibrium in the market.
“Speculation on the Dalian Commodity Exchange [DCE] iron ore futures contracts is reflected in physical iron ore trading prices at Chinese ports and the seaborne market … the extent of the parabolic increases in iron ore prices have been exacerbated by futures speculation,” he said.
“Therefore, it is the Chinese regulators prerogative to investigate speculation by institutional and retail investors in the domestic market.”
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Widnell said Chinese authorities might increase margin requirements to stave off speculation from retail and powerful institutional investors “playing casino” at the DCE and the Singapore Exchange where most iron ore futures are traded.
On Wednesday, the DCE announced a cap on the trading position of May 2021 delivery contracts of 5,000 lots from next week.
Ian Roper, general manager of Shanghai Metal Markets Singapore, said that even with some hurdles to shipments, there was less “tightness” to supply a year ago.
It doesn’t make a great deal of sense the price is so much higher
“So it doesn’t make a great deal of sense the price is so much higher,” he said.
“Speculative capital flow is clearly a contributor. There isn’t much fundamental support for prices above US$100 per tonne.”
But Melinda Moore, managing director of Cleanup Commodities, said there was also demand-side pressure on prices, mainly as a result of China’s push to drive its economic recovery.
“Iron ore prices are actually galloping to eight-year highs due to the colossal explosion in structural global build build build demand momentum,” she said.
