Early sign China is headed for failure in its push to drive iron ore price down

China’s new push to hurt Australia’s biggest import spooked the market yesterday, but it already looks as if the plan could be failing.

It has only been a couple of days since China renewed its push to drive down the cost of Australia’s biggest import – iron ore – but it already looks as if the plan could be failing.

After being humiliated by its strong words and measures to manipulate the price of the vital steelmaking ingredient over the past four weeks, Beijing this week went one step further.

The superpower’s authorities came out swinging on Monday saying they had launched a major new investigation into iron ore prices – which continued to rise over the past month despite Beijing’s previous efforts to send them into downward spiral.

China has been desperately been trying to push iron ore prices down. Picture: AFP

As the news broke early this week, the market appeared to have been spooked and iron ore prices took a tumble.

Chinese state media was quick to brag about the impact of the announcement on iron ore prices, stating that the iron ore futures closed 7.2 per cent lower on Monday on the Dalian Commodity Exchange.

However, there are already signs the market is not bowing down to China’s threats as the price rose by an impressive 3 per cent in the past day of trading.

According to CommSec, the $6.15 rise means a tonne of the stuff will now fetch $212.70.

Iron ore up $6.15 or 3% to $ 212.70

— CommSec (@CommSec) June 22, 2021

It’s only a one-day trend, but it’s a positive early sign for Australia – which rakes in about $136 billion a year from iron ore – especially when compared to what happened a month ago.

After China’s last muscle flexing exercise this time last month, the price of the valuable steelmaking commodity slumped after hitting a record high of more than $US230 ($A300) a tonne in April.

In late May, China’s National Development and Reform Commission (NDRC), along with four other departments, vowed to severely punish “excessive speculation, price gouging and other violations” that they say helped lift prices.

The price of iron ore slumped 11 per cent in the days that followed the NDRC’s meeting – with some analysts predicting the downward trend.

A Capital Economics report shortly after predicted iron ore prices could drop back to around $US140 ($A185) per tonne by end-2021, and $US120 ($A160) per tonne by end-2022.

Some analysts even suggested that “iron ore may not trade above $US200 ($A265) again”.

But what a difference a month makes.

Despite a short blip following China’s latest announcement, iron ore looks to be holding its own and some experts are predicting the renewed crackdown will spell bad news for Beijing.

Stephen Bartholomeusz, a senior business commentator for The Sydney Morning Herald, said that China’s efforts could have precisely the opposite effect to their intentions.

Iron ore’s price is still holding strong. Picture: Amy Coopes/AFP

In an analysis piece, he wrote that reducing activity in futures markets might knock out purely speculative activity and appear to influence the future trajectory of prices but derivatives are used by real consumers – like steel companies – to provide price certainty and to protect themselves against future price rises.

“Thus, deterring China’s companies and traders from ‘speculating’ in futures markets or running down its national strategic reserves of commodities might produce near-term price falls (albeit that they seem to have been quite transitory) but are likely to increase volatility and uncertainty and exacerbate price spikes in future,” he wrote.

What is China trying to do?

China’s National Development and Reform Commission (NDRC) – the nation’s top economic planner and market regulator – descended on Beijing’s Iron Ore Trading Center on Monday to discuss their battle plan.

After the meeting, the group issued a strongly-worded statement saying that the current high price was not sustainable and it was taking a heavy toll on Chinese businesses.

It revealed for the first time it had launched a joint probe into the trading volume and prices of iron ore – immediately sending shockwaves through the market.

“China supports the sound development of the iron ore spot trading platform in line with the law. At the same time, the country will keep a close watch on the spot market price, promptly identifying abnormal transactions and speculation,” the NDRC said in a statement.

It said that behaviours such as signing exclusive agreements, spreading price increase information, bidding up prices and hoarding will be severely punished in accordance with the law.

The NDRC also announced on Friday that an investigation has been launched into coal prices, as China is taking several steps to stamp down commodity prices.