China’s Steelmakers Say Iron Ore Imports Are Too Pricey
(AFR) — Surging iron prices have taken a hit from signs the Chinese government could act on complaints from Chinese steel mills that market manipulation by futures traders is squeezing their profit margins.
Iron ore futures, which hit a five-year high last week, fell almost 4% late Friday after a top official representing China’s powerful steel industry said Beijing was preparing to crackdown on soaring prices.
Dual-listed shares in Australian miners BHP Billiton and Rio Tinto fell sharply in London on news that China’s top steelmakers had formed a working group to investigate “irregularities.” Analysts warned any move by the Chinese government to respond to the industry complaints would result in lower prices for imported iron ore, although a shortfall meant volumes were not threatened.
Higher iron ore exports pushed Australia’s trade surplus to a record A$5.7 billion ($3.95 billion) in May and exports to China during the month surged 18%, data released last week showed. China’s continued demand for Australian iron ore will be crucial to achieve the first current account surplus since the 1970s.
The price of iron ore hit a five-year high of more than $126 a ton last week before falling on Friday to as low as $107 a ton.
Qu Xiuli, vice president of the China Iron Steel Association (CISA), told a conference in Shanghai on Friday that the “relevant department” in the Chinese government was investigating the price hikes in the first six months of the current year.
She was quoted by state media as saying that Beijing would take measures to crack down on “irregularities,” including sharp price increases and reports of price manipulation. Any move was expected to target futures traders whom the steel industry has accused of manipulating prices.
Her comments followed news that Chinese steelmakers, led by industry giant Baowu Steel, had set up a working group to find ways to tackle soaring prices.
A global shortage of iron ore has bolstered exports for BHP Billiton, Rio Tinto and Fortescue Metals, driving prices to five-year highs.
Qu said there was a “distorted” relationship between the price of steel and iron ore. CISA said steelmaking profits had fallen 18.2% for the first five months of the year compared to a 19.1% increase in imported iron ore prices.
Shares in Rio Tinto and BHP Billiton fell in London trading on Friday after news of the possible pricing move first appeared late Friday. Rio Tinto closed 3.8% lower and BHP fell 2.8%.
China’s Economic Observer reported earlier that steelmakers, led by Baowu Steel, would set up a working team to look at pricing issues. It followed reports Chinese steel future traders were taking advantage of the high iron ore price and pushing up the price.
Traders in China said the move would not hurt demand for Australian iron ore in China but it would lower the price of the steelmaking commodity. Iron ore futures in China fell as much as 3.5% on the news on Friday. The price of iron ore hit a five-year high of more than $126 a ton last week before falling on Friday.
The federal government said last week Australian iron ore exports were set to drop for the first time in almost two decades following bad weather and output setbacks.
Analysts said demand from China, Australia’s biggest export market, was close to peaking as the world’s second biggest economy slows.
But Beijing’s stimulus spending programs meant domestic construction remained robust while China’s Belt and Road Initiative, which is predominantly carried out by Chinese firms, also meant steel demand was high.
“Iron ore demand is near its peak. There is very limited growth potential for China’s iron ore demand,” Xu Xiangchun, chief information officer for MySteel, said, noting China’s GDP growth was expected to slow this year.
But he said local governments were encouraging infrastructure investment and high quality construction would require more steel. “We won’t see a significant or sharp drop in steel demand,” he said.
Xu said he did not think the push by steelmakers to lower prices would have a significant impact on import volumes, but prices could fall.
In Australia, a Department of Industry, Innovation and Science (DIIS) report last Monday said the government was cutting its 2019 forecast to 814 million tons from its earlier March forecast of 867 million tons as it boosted its estimate for this year’s average price by almost 20%
That would be the first contraction since 2001. Last year, Australian exports totaled 835 million tons. The value of Australia’s exports is set to climb to $79 billion in financial year 2020, reflecting higher prices that are largely due to Vale’s dam disaster in January, the department said.
Rio Tinto and BHP Billiton did not immediately respond to requests to comment.
This story was originally published by the Australian Financial Review.
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