Chronicle – China’s latest hit on iron ore could be déjà vu again: Russell

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LAUNCESTON, Australia (Reuters) – The fall in the price of iron ore on Monday reportedly had a familiar effect on market participants, following another attempt by China to cool down what its officials see as an overheated market.

FILE PHOTO: A man walks past an iron ore blending site at the port of Dalian, Liaoning province, China September 21, 2018. Photo taken on September 21, 2018. REUTERS / Muyu Xu / File Photo

The question for the market is whether Beijing’s efforts will bear fruit this time around? Or is Monday’s crisis just another incident and China is still unable, or unwilling, to take action that will force iron ore prices down in such a way? significant?

China’s economic planner, the National Development and Reform Commission, said Monday that it and the market regulator are jointly reviewing the iron ore market and cracking down on hoarding and speculation.

Regulators have said that China, the world’s largest importer of iron ore, will closely monitor spot trade prices and investigate malicious speculation in a timely manner. They will “strictly punish and disclose” irregularities such as sky-high prices and hoarding, according to a statement.

The announcement had the desired breathtaking effect on iron ore prices, with the most-traded September contract on the Dalian Stock Exchange ending on Monday down 8.8% to 1,121 yuan (173, $ 31) per tonne, a three-week low.

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

The spot price of iron ore for delivery in northern China, as valued by commodity price reporting agency Argus, fell 6.3% to $ 205.75 per 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 Stock Exchange fell 5.7% to $ 195.05 per tonne. This contract expires July 31, but the June 30 expiration contract saw a more modest drop of 1.5% to end at $ 210.79 per tonne.

It should be noted that neither Chinese domestic futures nor international price indexes have seen such steep drops as the last time Beijing threatened a crackdown on iron ore in mid-May, when the limits and trading fees have been increased.

Around that time, the spot price of iron ore fell 11% from a record high of $ 235.50 per tonne on May 12 to $ 209.05 on May 14, the intervening day not seeing exchange due to a public holiday in Singapore.

The spot price continued to decline in subsequent trading sessions, hitting a low of $ 188.50 per tonne on May 27, before resuming its uptrend to hit the recent high of $ 223 on June 15.

Dalian futures fell 9.8% in the two days following the record close of 1,315 yuan per tonne on May 12 and fell to 1,021 yuan on May 27 before resuming their rise.

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

There are two sides to the iron and steel coin: Beijing is really only able to control demand, and it can only really do so by controlling the production of steel plants.

China indicated in early 2021 that it did not want steel production to surpass the record 1.05 billion tonnes reached in 2020, in part to control energy consumption and pollution.

However, the reality after five months is somewhat different, with steel production reaching an all-time high of 99.45 million tonnes in May and production in the first five months of the year already reaching 473.1 million. tonnes, an increase of 14% compared to the same time of year. earlier.

SUPPLY RECOVERY?

Supply is the other factor, and this is where Beijing has virtually no control, being dependent on volumes exported by the major shippers, namely Australia, Brazil and South Africa.

There are signs that the supply is approaching its potential, after weather events reduced some volumes from Australia’s main exporter. Meanwhile, the number two exporter, Brazil, is still fighting to contain the coronavirus pandemic, as is South Africa.

Australia exported around 76.59 million tonnes in May, according to ship and port tracking data compiled by Refinitiv, this month being the second largest month of the year behind 76.73 million Of March.

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

South Africa’s exports amounted to 4.78 million tonnes in May, the second largest month this year.

Even with a pick-up in supply, it’s hard to envision a situation where iron ore prices drop significantly – unless China actually restricts steel production or makes a significant shift towards use. of scrap metal in electric arc furnaces rather than the more common iron ore in coal-fired coking furnaces. .

Until then, it is likely that Beijing’s decision to lower prices will be a case of the famous quote from American baseball legend Yogi Berra: “This is déjà vu once again.

Editing by Kenneth Maxwell

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