China Steps Up Campaign to Control Iron Ore Prices
Iron OreSCMP

China Steps Up Campaign to Control Iron Ore Prices

Bloomberg, citing people with knowledge of the matter, reported that China has stepped up its campaign to rein in commodity prices and reduce

Bloomberg, citing people with knowledge of the matter, reported that China has stepped up its campaign to rein in commodity prices and reduce speculation in a bid to ease the threat to its pandemic rebound from soaring raw material costs. The State owned Assets Supervision and Administration Commission has ordered state owned enterprises to control risks and limit their exposure to overseas commodities markets and companies have been asked to report their futures positions for Sasac to review. It’s unclear what could have triggered Sasac’s latest order but the regulator hasn’t ruled out further measures, including those that target specific companies under its control. The government had already asked domestic firms, including steel mills, commodities merchants and brokerages, to reduce bullish bets on local futures markets for highly volatile raw materials like iron ore and coal.

China has accelerated its efforts in recent weeks to curb the inflationary pressures that threaten its economic recovery from the pandemic. The surge in iron ore prices has raised concerns about market speculation with Chinese officials, who have been ramping up measures to cool the market down. Government inspections aim to stop speculation and irregularities. China Iron and Steel Association proposed an industry self-review initiative last month, urging the iron and steel industry to strengthen market order to further promote high-quality development of the industry while vowing steel enterprises will adjust their export strategies to safeguard the domestic supply.

Global Times separately reported that China Iron and Steel Association Vice President Mr Luo Tiejun held a meeting with the Nippon Steel's China Chief Representative on 15 June. The two parties held a friendly exchange on issues such as controlling production capacity, raw material prices, regulating iron ore pricing mechanisms and steel market trends in the second half of the year. Exchanges and working in partnership on steel and iron ore market between China and Japan are conducive to clamping down on global soaring prices of iron ore and a more reasonable pricing mechanism is one measure which could address under pressure supply chains. Given current China Australia souring ties, diversifying the sources of supply for much needed iron ore has become part of China's long term strategy to fend off the risks of too much reliance on any single source.

China’s National Development and Reform Commission in May briefing had directed that Chinese firms should boost domestic exploration for iron ore, widen their sources of imports and explore overseas ore resources. China has been ramping up efforts to reduce trade risks. One conspicuous case is the reduction of Australian coal imports. In 2020, China imported 300 million tonnes of coal in total, of which 78.09 million tonnes were from Australia, accounting for 26%, second only to Indonesia accounting for 46%. This year, Mongolia has become China's biggest supplier of coking coal after China banned imports of Australian coal. While an outright ban would be almost unimaginable, various forms of restrictions, delays or increased administrative burdens on Australian iron ore imports cannot be ruled out.

Japan imported around 99 million tonnes of iron ore in 2020, decreasing for the sixth year in a row. On the other hand, China's imports were nearly tenfold of that, with more than 80% sourced from Australia and Brazil. China's imports of iron ore from Australia accounted for 61% of China's total imports in 2020. The latest data from China's customs authority showed that China's imports of iron ore in January to May 2021 surged by 6% YoY to 472 million tonnes.

Driven by strong demand recovery & margins, Chinese steel mills are continuing to produce steel at record levels, thus needing additional volumes of imported iron ore. As a result, average iron ore prices in May & June have surged to USD 212 CFR China & USD 222 CFR China, more than double of USD 94-103 CFR in May & June 2020.

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