Iron ore prices drop after China warns of ‘excessive speculation’

The price of steelmaking ingredient iron ore fell sharply after China signalled it would focus on efforts to cool soaring prices, warning of “excessive speculation” as concerns grow over rising inflation.

The National Development and Reform Commission, China’s economic planning agency, said on Monday it would crack down on monopolies in commodities markets, the spread of false information and hoarding.

That message rippled through markets on Monday with the main futures contract for iron ore dropping 7 per cent on China’s Dalian exchange to Rmb1,049 ($163) a tonne. Iron ore has lost almost a quarter of its value since hitting a record high earlier this month. The aluminium futures contract for July delivery dropped 3 per cent on the Shanghai exchange.

The Chinese government’s statement reflects its mounting concerns over soaring commodity prices, which have been turbocharged by the country’s industrial recovery from the pandemic. The prospect of a global economic rebound has added further fuel to prices.

“I think there is increasing evidence of speculative excess,” said Robert Rennie, head of market strategy at Westpac, who suggested further intervention from Beijing was likely. Stronger than expected Chinese demand and returning global demand had been the main driver of prices, he said.

China is by far the world’s biggest consumer of commodities and higher raw material prices feed through to production costs. The country’s factory gate prices leapt 6.8 per cent year on year in April after having fallen for much of 2020.

In a statement following a meeting with China’s big metals producers, the NDRC said the price surges were linked to factors including “excessive speculation” and warned businesses not to join forces to manipulate markets.

Last week, state broadcaster CCTV cited a state council meeting, chaired by Premier Li Keqiang, which said measures should be taken to prevent commodity price rises passing through into consumer prices. The comments contributed to a sell-off in commodities on Thursday.

China’s consumer price index has remained low compared with the producer price index, with consumer demand lagging behind the industrial recovery. CPI rose 0.9 per cent year on year in April.

China’s economy reached pre-pandemic growth rates late last year. In 2020, it produced record amounts of steel as part of an industrial-driven recovery from the early shock of the coronavirus, which fed into a construction boom and increased demand for iron ore from Australia. 

An attempt to rein in carbon-intensive steel production, part of efforts to meet new environmental goals, helped push up prices earlier this year on expectations of supply constraints. 

“One of the reasons that you might be concerned about hoarding at the minute . . . the Chinese authorities have been basically telling the industry they want to cut back record levels of steel production,” said Rennie.