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China aims to tighten its grip on iron ore supplies

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China has shored up efforts to manage the iron ore industry in the past few years, with a broad two-fold focus on cooling rocketing iron ore prices and enhancing domestic supply resilience for its steelmaking needs.
Steel production has not only been vital to China’s economic growth as one of the largest industries in terms of revenue, but downstream finished steel products are also heavily utilized in sectors crucial to China’s growth – manufacturing, infrastructure and building construction.

“The broad-ranging impact of steel product supply and steel prices on major sectors of economic growth in China render it a strategic national interest. By extension, it is crucial to keep the prices of steelmaking raw materials relatively stable and economically viable,” according to a mill source based in Beijing.
Infrastructure investment has been a lynchpin to China’s economic growth, with infrastructure spending ranging high between 5 and 7% of China’s GDP. Increasing costs of building materials such as finished steel products threaten the viability of existing projects.

Prices of iron ore, the predominant component in steel production, are thus keenly scrutinized by the Chinese government, said a Xiamen-based trader source. The trader added that the heavy reliance on iron ore imports exposes the Chinese market to price fluctuations in the international seaborne market, which are complicated by price movements in the derivatives market. It is thus paramount from the Chinese government’s perspective to cap price surges in iron ore, which it has increasingly looked to achieve in recent years.

Enhancing state influence

Chinese authorities have previously sought to temper sharp hikes in iron ore prices through a series of advisories issued by the National Development and Reform Commission (NDRC) and the China Iron and Steel Association (CISA) cautioning against price speculation in the iron ore futures market and stock hoarding.

“The stern warnings from the NDRC had the effect of cooling down rocketing prices in the futures market on the Dalian Commodity Exchange (DCE) as speculators momentarily receded from their positions for fear of punitive action from Chinese authorities. The impact of these efforts was successful in the short run. However, market prices would be driven up by price surges in the futures market a few months down the road,” according to a trader source based in Singapore.

In February 2022, Chinese authorities adopted an unprecedented slew of additional measures in response to price surges in the iron ore market, signalling the determination of local authorities to stabilize iron ore prices. Beyond the issuance of official warnings against market speculation and portside stock hoarding, the NDRC issued notices to a number of large trading houses to meet up with local authorities.

“Representatives from the trade houses were told to have their trading logs and port inventory numbers ready for declaration. This was an unprecedented move that prompted many market participants into laying low for the time being at the risk of being subjected to further regulatory oversight,” according to a Shandong-based trader.

Beyond meetings with major trading houses, the NDRC also sought to enhance regulatory presence in Chinese ports. The NDRC met with domestic port operators to explore measures of shortening existing free storage periods of iron ore for traders so that they would shy away from hoarding.

“The various meetings by the NDRC with the port operators as well representatives from the DCE was a visible step-up from its previous approach and this injected an increased level of uncertainty about further government intervention. Iron ore prices visibly retreated from their previous rally in response to these enhanced measures,” a trader source based in Singapore said.
Nonetheless, some traders remain sceptical about the long-term effectiveness of these interventions.

“Government intervention on iron ore prices is only able to suppress market prices in the short run. One can easily observe how iron ore prices behave in a cyclical fashion over the years – they trend lower after various interventions from the government and begin to spike up a few months later, riding on bullish sentiments in the market,” another trader source in Singapore said.

Controlling supplies

Other traders are more optimistic about the longer-term strategies adopted by the Chinese government to control iron ore supply. “Expanding domestic ore production can enable steel mills to have alternative supplies of iron ore, especially when seaborne prices trend upwards, insulating the costs of steel production from external fluctuations,” according to a trader source based in south China.

In a bid to reduce China’s reliance on iron ore imports and minimize the country’s exposure to global iron ore market fluctuations, the Chinese government announced plans to promote the development of domestic iron ore mining projects and iron ore reserves.
In early March, CISA laid out a specific ‘cornerstone plan’ in charting out the expansion of iron ore output. The plan aims to increase China’s iron ore output to 370 million tonnes in 2025 (up from 270 million tonnes in 2020).

The announcement by the Ministry of Natural Resources of China to develop 25 large-scale iron ore mining projects and 28 state-level mining areas was a strong signal by the government of its interest in boosting domestic supply resilience as well as to wean China off its heavy reliance on iron ore imports, a Singapore-based trader source said.

Some traders were sceptical about the short-term benefit of this strategy. “It is without a doubt that the measures to boost domestic ore production shores up China’s iron ore supply security. Nonetheless, one must not underestimate the dependence of the Chinese market on overseas fines. Australian iron ore imports will continue to occupy a sizeable market share in the Chinese market up till the end of the decade,” another Singapore-based trader said. The trader acknowledged that other measures beyond boosting domestic supplies are required to fulfil the goal of price stability.
Some traders are expecting the emergence of a previously announced centralized trading platform to allow the Chinese market to win back greater control. “A common trading platform between the mine majors and Chinese buyers will be able to level the playing field between buyers and sellers and allow for domestic market fundamentals to be more accurately reflected in the seaborne market,” according to a Shanghai-based trader.

In late February, the NDRC announced that it is seeking to establish a single, state-backed platform for iron ore procurements. The proposed centralized platform will allow iron ore suppliers to negotiate deals directly with domestic buyers.
While fundamental details of the platform and its operational model remain to be announced, market participants remain split in their reaction towards centralizing market trades. Some iron ore market participants are expecting the platform to be rolled out as soon as the third quarter of the year, citing the government’s renewed resolve in stabilizing iron ore prices.

“The increased presence of the NDRC on the iron ore market is a signal to many market participants of the government’s determination in stabilizing prices. Establishing a trading platform will be able to consolidate the government’s efforts in managing price surges,” according to a Singapore-based trader.

“It would be easy for the proposed platform to leverage on the existing capacities and contact base of the state-affiliated Beijing Iron Ore Trading Centre Corporation (COREX). Instead of establishing a separate platform which would possibly require a longer lead time, COREX can take on a broader set of functions,” according to a Xiamen-based trader source.

Most market participants remain uncertain about the establishment of the trading platform. “There is a fundamental difference between the seaborne and the domestic portside market due to the presence of a large time lead in cargo shipping. Negotiated prices at the Chinese ports are based on cargoes with short loading notices in contrast with the seaborne market whereby negotiations are made on cargoes with longer laycans. Establishing a common trading platform capable of synergizing these differences would be a challenging feat,” according to a trader source based in Singapore.
At present, there are various concerns about the potential establishment of a new platform. A main concern would be whether the platform would be conducting trades in Chinese Yuan or in US dollars. “Another factor to account for would be whether the Australian and Brazilian mine majors would be amenable to trading on a centralized, highly-regulated platform,” according to a trader based in northern China.

Regional iron ore suppliers were also sceptical about the eventuality of a centralized trading apparatus. “Barring the lack of details on the platform as of now, we still think that the fundamental concept of a willing buyer and willing seller still applies. If the trading terms established on the platform veer too far from a regular competitive market, producers have the option to sell their product to other buyers in other markets,” a seller source from Australia said.

Supplies and prices for a vital commodity that is iron ore remain a critical part of Chinese government strategy, particularly in a period where economic recovery remains a priority. Beyond the adoption of short-term domestic market interventions, the success of China’s longer-term measures in insulating its iron ore market from the overseas market remains to be seen.

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