Frustration behind Chinese accusations of miners' iron ore market manipulation
The steel sector's mouthpiece, the China Iron and Steel Association, has long been waging a campaign against the way the iron ore price is set, after being forced to shift to the current short-term spot price based on price indices in 2009. For decades before that, prices were set by annual negotiations.
There is some merit in the accusations - most analysts believe the big miners do have the scope to opportunistically push a few shipments around to strategically cash in while prices are high.
Similarly, the uniform destocking seen in China's steel mills late last year, amid the uncertainty of the leadership transition in Beijing, saw iron ore prices plunge precariously to three-year lows.
But it is the miners - especially low-cost producers such as BHP and Rio Tinto - who are earning healthy margins on the sale of iron ore. And despite what you hear about China's voracious appetite for our biggest export earner, their steel sector is inefficient, over-capitalised - and bleeding losses.
Much of the NDRC's accusations stem from frustration that while it relies on imports for two-thirds of its iron ore supply, it has little control of pricing.
But manipulation or not, the iron ore price appears on the way down, if gloomy dispatches from a major iron ore conference in Beijing last week are any indication.
Commodities analysts are lining up to tip sharp falls in the iron ore price. Deutsche Bank is tipping US$115 a tonne by year end; J Capital is tipping it to fall below US$100 a tonne by mid-year; most bearish of all is Tom Price of UBS, who says the price may tumble to US$70 a tonne by September.
Frequently Asked Questions about this Article…
Chinese authorities, including the National Development and Reform Commission (NDRC) and the China Iron and Steel Association, have accused the big miners of manipulating iron ore prices — a long-running complaint that has escalated because the NDRC rarely gets involved and spoke in unusually abrasive terms.
Many analysts say there is some merit to the accusations: large, low-cost producers can opportunistically shift a few shipments to cash in while prices are high, giving them scope to affect short-term spot pricing.
For decades iron ore prices were set by annual negotiations. In 2009 the market moved to short-term spot pricing based on price indices, which the China Iron and Steel Association has long criticised.
China imports about two-thirds of its iron ore and the NDRC is frustrated that it has little control over pricing. That dependence, combined with an inefficient and over-capitalised domestic steel sector, underlies the complaints.
Uniform destocking by China’s steel mills late last year — driven in part by uncertainty around Beijing’s leadership transition — pushed iron ore prices down to three-year lows, illustrating demand-side volatility.
Commodities analysts are forecasting sharp falls: Deutsche Bank has tipped about US$115 a tonne by year end, J Capital expects it could drop below US$100 a tonne by mid-year, and UBS analyst Tom Price warned it may tumble to around US$70 a tonne by September.
The article notes low-cost producers such as BHP and Rio Tinto have been earning healthy margins on iron ore sales. However, sharply lower benchmark prices would likely pressure revenues, even for low-cost miners.
Investors should monitor Chinese steel mill destocking and demand signals, official comments from the NDRC and industry bodies, and analyst price forecasts (US$115/tonne, below US$100/tonne, or as low as US$70/tonne have been suggested) since these factors drive iron ore price direction and miner profitability.
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