Iron ore prices’ relentless rise this year went into overdrive Monday, hitting a +10% limit up and prompting the Dalian Commodity Exchange to raise trading limits and margin requirements in an effort to calm speculation.
Separately, the Shanghai Futures Exchange said it would set fees for closing positions on its steel rebar and hot-rolled steel coil futures contracts at 0.01% of the total transaction value. Those transactions had previously been free.
Meanwhile, on the Singapore Exchange, the June contract for iron ore leaped 10.3% to a record $226.25 per ton.
Despite fears this would squeeze mill margins, sales prices moved in tandem. The South China Morning Post reported nearly 100 Chinese steelmakers adjusted their semi-finished steel prices sharply upwards yesterday to compensate.
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Strong iron ore demand
Iron ore prices have been rising on the back of strong demand. Increases of this magnitude and at this speed could not occur in a weaker demand environment.
Fears of high-purity iron ore shortages have been circulating for months. The widespread belief is steel demand globally is on the rise, not just in China. That demand is squeezing supply chains and playing into the hands of miners.
But two other factors are at play here.
Speculative activity, China-Australia tensions
The first is speculative activity, which is firmly in the sights of the exchange’s moves to raise trading costs and margins requirements.
A second factor is the probability Beijing’s furious reaction to Australian government statements regarding the origins of COVID-19, the treatment of minorities in Xinjiang and the quashing of political dissent in Hong Kong have played a part.
As a result of Canberra’s comments on these issues over the last year Beijing slapped tariffs on Australian barley, beef and wine. The move aims to send a message to Canberra to retract its criticisms.
The Australians declined. The result has been a growing fear among iron ore traders and consumers that iron ore may get added to the list. That fear is encouraging consumers to scramble for supplies and leading to a bidding war for cargoes.
Tariffs are not the only tool in Beijing’s box.
There are fears funding from state banks may dry up for imports on Australian iron ore. The Financial Times even suggests China may move to temporarily pause purchases.
Some finished steel prices have jumped by 10% this week alone. Many others have risen by at least half that, on top of double-digit rises in Q1.
Some fear this will stoke inflation in China. That may not be far from minds in Beijing, too. But the cost to the balance of payments is also a factor.
China is the world’s largest importer of iron ore and coking coal. Such rapid price inflation seriously impacts the country’s competitive position.
As such, expect further action by Beijing. Prices have almost certainly detached themselves from the fundamentals, which hasn’t stopped speculators before. However, that does invite more determined action by Beijing to prevent matters getting worse.