Commodities Exchange Warns of Bubble as Iron Ore Futures Hit Record Highs

Iron ore futures soared to all-time highs this week in China, more than doubling from April levels, prompting the local exchange operator to warn of a speculative bubble as Beijing also sent signals that could foreshadow government intervention.

As producer of more than half of the world’s steel, China is also the largest iron ore importer and its largely state-owned production complex employs thousands around the country. Accordingly, producers and officials in Beijing closely follow the prices of iron ore — one of the main components of steel production — and have pushed for China to play a larger global role in determining its price.

That price has soared in recent months, with the benchmark contract on the Dalian Commodity Exchange rising nearly 10% on Monday alone to 1,144.5 yuan ($175) per ton — a record since the contracts began trading in 2013. The price represented a 50% jump from levels in late October, and was more than double the price in early April when many factories were still closed or partially shut down at the height of China’s Covid-19 epidemic.

The spiking prices prompted the Dalian Commodity Exchange to issue a statement Sunday saying that speculative funds had poured into the market this year seeking to take advantage of imbalances in China’s massive steelmaking sector. It also pointed out that despite the big gains, its contract prices have been consistently below international levels, which are also at a seven-year high.

Future and spot prices have been pushed higher by tighter supplies created by the partial shutdown of a major mine in Brazil operated by that country’s Vale SA, the world’s second-largest producer. At the same time, trade tensions are running high between China and Australia, one of the world’s other big iron ore suppliers, leading to concerns about possible future disruptions.

China has recently slapped anti-dumping tariffs on a number of Australian products, including wine and barley, and the nation has stopped importing Australian coal. Those steps have come as Australia earlier took steps to block Chinese telecom equipment from being used in its 5G networks, and as other tensions flare related to the global pandemic.

Some of the nation’s top steelmakers say the recent price spike defies simple imbalances between supply and demand and is well above market expectations. At a Dec. 10 meeting of the China Iron and Steel Association, some leaders said the spike represents an “obvious sign of capital speculation,” according to a statement (link in Chinese) released on the association’s website after the meeting.

One senior industry analyst said the market isn’t currently in a state of imbalance, since stockpiles haven’t dwindled to levels that would normally be considered very tight. He noted that even though spot prices have climbed, the level of those increases is still well below the jump in prices for futures contracts. He noted the recent spike could be due to accelerating worries that supplies could get tighter in the future. “That’s causing a year’s worth of rises to get expressed in a single month,” he said.

At an industry forum on Thursday, an official from China’s Ministry of Information and Industry Technology (MIIT) pointed out that China’s State Council had taken note of the recent spike in prices. Such signals often point to looming government intervention aimed at stabilizing markets. In one such development earlier this month, speculation about such intervention after two coal price index compilers abruptly stopped publishing daily updates after a large increase in prices for the fossil fuel.

Contact reporter Yang Ge (geyang@caixin.com)

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