·
Daily limit on opening futures
positions is reduced to 2,000 lots for non-brokerage traders – the third time
the limit has been reduced this month
·
Some analysts say
supply-and-demand fundamentals alone would keep prices at US$120 a tonne or
lower
Iron
ore prices have started to fall after China’s Dalian Commodity Exchange (DCE)
tightened its trading rules on Monday in an effort to cool prices that had
reached their highest point since 2011.
On
Thursday afternoon, iron ore was trading at about US$162 a tonne after closing
on Monday at US$176 – the highest price this year, and more than twice the low
of about US$81 a tonne in late March, according to the MBIOI-62 price index.
The
pivot comes after the DCE tightened its limits on opening futures positions to
2,000 lots a day for non-brokerage traders from Tuesday – further reducing it
from a limit of 5,000 lots imposed on December 9, just six days after limits
were set at 10,000 lots.
While
the DCE has been reducing trading positions, prices remained buoyant,
especially after
data released in mid-December
confirmed
continued industrial growth and an increase in retail sales in China. A deadly
landslide last week at a Brazilian mine owned by Vale SA also sparked supply
concerns.
The
high price of iron ore has squeezed Chinese steel mill margins, prompting
discussions last week between the nation’s industry body – the China Iron and
Steel Association (CISA) – and major Anglo-Australian miners
BHP
and
Rio Tinto
over
price control. This raised concerns that iron ore could become entangled in the
China-Australia conflict.
But
the Australian miners assured CISA that, for their part in the supply chain,
they had made efforts to increase iron ore shipments, which should put downward
pressure on prices. They also agreed to work with CISA to address the pricing
concerns.
Both
the DCE and CISA agreed that, aside from fundamental supply and demand of iron
ore, speculation via financial derivative contracts was driving up prices.
Demand
for iron ore in Chinese steel production has increased sharply amid China’s
economic recovery. Other factors driving up prices include seasonally lower
mining production due to weather conditions, and Brazilian miner Vale’s
still-muted output following the January 2019
collapse of a mining dam
.
But it
is the futures speculation that many analysts have specifically pointed to in
recent weeks, with punters seeking higher returns in a low interest rate
environment.
Ian
Roper, general manager of Shanghai Metal Markets Singapore, said that if
speculation were effectively curbed by the DCE, iron prices could slide to
about US$90 to US$120 a tonne – the equilibrium price based solely on
fundamental supply and demand.
“Iron
ore has been a tight market for most of the last two years, with prices mainly
between US$90 to US$120 a tonne, so it would be totally reasonable for prices
to fall all the way back below US$120 on fundamentals,” he said.
Navigate
Commodities managing director Atilla Widnell said iron prices could drop to
about US$120 to US$130 a tonne based on fundamentals.
The
DCE has pledged to step up its market surveillance through overseeing margin
calls, as well as other measures to prevent the overheating in futures trading,
following requests from CISA, according to analyst Mysteel Global.
But
not all analysts agree that speculation is predominantly responsible for the
sudden rise in iron ore prices, saying they are notoriously volatile even
without speculation, and that supply and demand alone have done most of the
price pushing.
“Critics
may point to the recent price surge as a sign that something is wrong and that
prices have divorced from fundamentals. Looking at the last six years, that
might seem a reasonable assertion; never have prices moved so much, so fast,”
Julien Hall, S&P Global Platts Asia metals lead, said in a note on Tuesday.
“But cast your eye farther back in time and you will find that such volatility
is entirely consistent with history.”
It should really come as no surprise to see iron ore
prices surging to the current extentJulien Hall, S&P Global
Platts Asia
Hall
cited examples from the financial crisis in 2008 when prices shrunk two-thirds
from US$170 a tonne to US$57 a tonne in three months, and then doubled between
October 2009 and April 2010 before dropping 47 per cent in the following three
months. In late 2012, prices spiked 74 per cent over four months.
During
this time, iron ore derivatives were not trading heavily, while the DCE only
started its iron ore futures trading in 2013.
“This
seemingly undermines the argument that speculative futures trading is
responsible for abnormal volatility,” Hall said. “With global steel markets
seeing their sharpest uptrend in over a decade thanks to post-Covid
infrastructure spending, it should really come as no surprise to see iron ore
prices surging to the current extent.”
Other
analysts also point to the fundamental demand and supply as the main drivers of
iron ore prices. Gavekal Dragonomics said in a note last week that the current
price rally was driven by steel mill demand outpacing iron ore supply.
“The
unexpectedly sustained strength of Chinese exports in the second half absorbed
inventory further at a time of year when the steel demand is normally weak,” it
said. “Supply, meanwhile, has been slow to adjust.”
Source: SCMP