The recent rebound in iron ore prices has sparked yet another attempt by China’s authorities to dampen speculative activity.
At the weekend, China’s National Development and Reform Commission (NDRC), its key economic planning agency, said it would “pay close attention” to changes in the iron ore market.
In a statement issued on Sunday, the agency said it would work with relevant departments to “severely crack down on illegal activities such as fabricating and disseminating information on prices increases, hoarding and price gouging, so as to effectively ensure the smooth operation of the iron ore market.”
It had instructed “relevant information companies” and reminded them to carefully verify and ensure accuracy before releasing market and price information, it said.
The NDRC’s intervention was against the background of a sharp increase in iron ore prices, which have risen about $US11 a tonne, to more than $US122 a tonne, since the start of the year. As recently as November iron ore was trading as low as $US80 a tonne.
The price has surged in line with China’s reopening of its economy, with the ditching of the severe “zero COVID” response to the pandemic it adopted in 2020.
Every time the iron ore price rises significantly the authorities have called local mills and traders in for a stern warning that their actions were being scrutinised.
Despite the wave of infections and deaths China is now experiencing, the dramatic u-turn in COVID policy has ignited optimism that an economy that is thought to have grown at 3 per cent or less last year – which would be its second-lowest growth rate in almost half a century behind the 2.3 per cent in 2020 when the pandemic first struck – will now rebound sharply.
China’s authorities have prioritised boosting domestic demand to help underwrite a recovery while taking steps to support the country’s ailing property sector. They are contemplating a record level of local government bond issues to help boost infrastructure investment, along with more expansive fiscal and monetary policies.
Last year China, which accounts for about 70 per cent of the world’s seaborne iron ore trade, produced about 1.11 billion tonnes of steel, a drop of about 1.5 per cent from 2021 levels. That reflected the lower levels of domestic activity and export volumes that slid as the year progressed. While exports rose 7 per cent over the year, they were down 9.9 per cent in December.
Greater infrastructure spending and more activity throughout the broader economy – and any recovery in the property sector – would quickly flow into more demand for iron ore by China’s steel mills, hence the surge in prices.
The latest attempt by the NDRC to stamp out what it sees as illegal activities in the iron ore market isn’t its first. Indeed, every time the iron ore price rises significantly the authorities have called local mills and traders in for a stern warning that their actions were being scrutinised.
The weekend statement was its second this year, with the agency warning the industry at the start of the year that it was highly concerned about price fluctuations and the rise in prices, which is described as “obviously speculative.”
While the rise in iron ore prices is clearly tied to the expectations of an economic rebound and the likely increase in demand for iron ore, Chinese officials have an innate distrust of markets.
A more substantial effort to intervene in the market is getting under way and may have an impact this year. Last year, China formed a new entity, China Mineral Resources Group (CMRG), to negotiate purchases of iron ore on behalf of about 20 of China’s largest steelmakers.
That’s an attempt to counter what China sees as the inordinate market power of the three big producers of seaborne iron ore, Rio Tinto, BHP and Brazil’s Vale. The other big iron ore exporter is Fortescue Metals.
CMRG will act as a single desk, consolidating the mills’ purchases and attempting to use its buying power as leverage against the producers.
It will also manage China’s offshore iron ore investments, including the giant Simandou project in Guinea. Simandou, which could be in production by the end of the decade, has the potential to produce about 100 million tonnes of high-quality ore.
How effective the consolidation of the major mills’ buying power will be is open to question.
China’s steel industry is highly fragmented, with more than 500 participants. The top 10 producers that will provide the core of CMRG’s demand account for about 40 per cent of all iron ore imports.
The iron ore producers have their own leverage, given that the four of them dominate the seaborne trade and at the low end of the industry’s cost curve and that Rio, BHP and Vale in particular are at the upper end of the industry’s quality curve. China’s domestic iron ore producers are the key marginal producers who effectively provide the base reference point for pricing.
China’s hope is that by concentrating the buying power of the major mills it can extract discounts from market prices from the big producers. That will only occur if the key producers – Rio, BHP and Vale – allow it.
The miners have had experience of regular pricing negotiations with government-sponsored negotiators in the past.
Until 2010, when BHP’s Marius Kloppers led the shift to index-related market pricing, the producers had annual negotiations with the biggest of the Japanese and Chinese mills in which they were played off against each other and ended up with prices for their ore that didn’t properly reflect the balances of supply and demand.
Since the shift to market-based pricing, there has been enormous investment in increased supply by the producers to meet China’s soaring demand, along with dramatic cost reductions, which are indicators of a market that is functioning as it should.
The producers won’t want to return to any system that resembles the pre-2010 model and are protected by the reality that, at least for the next few years, China has no alternate competitive sources of supply of a scale sizeable enough to undermine their position.
What the NDRC and CMRG might be able to achieve is some reduction in the volatility of the prices, particularly if CMRG is able to build its own inventories of ore.
That might dampen purely speculative activity and could, in fact, suit both the mills and the producers, assuming CMRG has the sophistication to manage its role effectively and efficiently and not simply add another layer of bureaucracy to a commodity market that has generally functioned well in the decade or so since it was transformed into an actual market.
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Source: Thanks smh.com