China takes aim at ‘illegal activities’ in the iron ore market

The price of iron ore fell 1.2 per cent on Monday morning, to £104.67 ($132.20) per tonne, bringing to a halt five weeks of gains after Chinese officials warned the country may intervene in the market.

The National Development and Reform Commission (NDRC) said on Friday it had met with major port operators to discuss iron ore inventory and storage. The NDRC has also cautioned against hype and “illegal activities” in the iron ore market.

Beijing is looking to curb rising iron ore prices amid worries about commodity inflation, whilst its stimulus measures for the long-suffering property market have simultaneously stretched iron ore supply and encouraged bulls in the market.

As Bloomberg recently reported, officials have earmarked 50 developers for funding as policymakers look to draw a line under falling property prices and slumping activity in the sector.

Demand for iron ore, a key ingredient in steel production, will benefit from any increase in activity in the housing market.

The price of iron ore is up by around 30 per cent from £87.25 ($110.2) per tonne in August. Citigroup has predicted that the price will soon pass £110.85 ($140) per tonne.

The real estate sector normally makes up about 40 per cent of the demand for iron ore, but China’s property troubles have led to an increasing proportion of demand coming from steel exports, shipbuilding and infrastructure spending.

This has encouraged resilience in the iron ore price despite weak recent property demand. Reduced availability of scrap metal, a cheaper alternative to iron ore in the production of steel, has also helped the price.

Now, Chinese officials face a tough problem: how to cap commodities inflation whilst encouraging the housing market.

China tends to cap steel production at the previous year’s level, but it is unlikely to do so this year. Steel production in January-October was up by 1.4% year on year and looks likely to top last year’s levels.

Other commodities stand to benefit from an improving property sector in China, including copper, aluminium and iron.
The copper futures price on COMEX rose from a low of $3.55 per tonne on October 5 to $3.81 per tonne on November 27.
Source: City AM reporter