With this in mind, the intervention last week by the China Iron & Steel Association (CISA) over soaring iron ore prices shows the metal’s spot market is not a purely trader-dominated environment.
“The iron ore market pricing mechanism has failed and steel companies unanimously call on the State Administration for Market Supervision and the China Securities Regulatory Commission to take effective measures,” the lobby group said, according to the South China Morning Post. The industry body has previously raised concerns over prices, so this is not a complete surprise.
An uncharitable person could compare this reaction to a football manager on the wrong side of a 3-0 loss who then blames the referee. But it’s not just buyers getting stung by multi-year highs who have noted this. In the first week of December, the Dalian Commodity Exchange said it would keep a closer eye on futures contracts and even called iron ore “extremely overvalued”, according to BMO.
Saxo Bank’s head of commodity strategy Ole Hansen said speculation in the market has been “running wild”.
More troubling for major iron ore suppliers like Rio Tinto (RIO), BHP (BHP) and Vale (Bra:VALE5) will be statements from closer to the heart of China's government. State mouthpiece the Global Times said Beijing had a duty to step in and help steelmakers, even if “rapid Australian officials” would react badly, so there is likely government interest in forcing iron ore prices down. Australia is already in a diplomatic spat with China, and Xi Jinping’s administration has blocked thermal coal imports and raised tariffs in other sectors.
In the past month, iron ore climbed from the already-high $120 (£89) per tonne (t) level it has sat at since August to over $150/t. Vale dropped its supply forecast for the year, wild weather caused export difficulties in Australia, and demand has remained strong in China.
Of course, the iron ore spot market only exists because the Chinese government agreed to it a decade ago. Previously, steelmakers negotiated with miners directly, setting a benchmark contract price.
For a steelmaker, looking for price stability is fair enough: fixed costs make running a business far easier. The spot price came about largely because BHP felt it was missing out on earnings. The major’s then-chief executive Marius Kloppers, who your scribe was serving at a bike shop in Melbourne at that very moment, forced a change in the system in early 2010.
Since then miners, have had good and bad from it. An initial price surge was followed by a major downturn in the sector, showing a more liquid market could bring downsides too.
So now the stage is set for Chinese intervention. The Dalian exchange has already stepped in and could limit sales. The nuclear option would be blocking iron ore imports from Australia, although even the hardheads at the Global Times recognise this would be unworkable for the metal's market.
Observers have pointed out that iron ore futures in Singapore have already come down since China ramped up the rhetoric over spot pricing, so the intervention may almost be over without a shot being fired.
Investors in Rio – whose iron ore-powered shares recently touched a fresh post-GFC high – will be watching anxiously, either way.
