Shockwaves in iron ore market as China launches investigation into prices

China has been left humiliated over its plans to cut Australia off, but now they have come out swinging and it has the market spooked.

Australia’s most lucrative commodity has taken a significant hit this morning after China spooked the market by revealing a major new investigation into iron ore yesterday.

Beijing had been left red-faced after the prices of the key steelmaking ingredient rebounded over the past four weeks, despite attempts to bring it down.

Experts said the Chinese Communist Party was “humiliated” by what was happening in the market, particularly since it buys over 80 per cent of its ore from Australia, which it has sought to cut-off over the past year.

However, the superpower’s authorities came out swinging yesterday saying they had launched a major new investigation into iron ore prices.

Any significant drop in prices would be bad news for Australia, because iron ore is currently bringing in more than $136 billion into our economy every year.

To show it means business, 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 yesterday 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.

A worker works at a furnace at a steel plant in Dalian, China. Picture: Reuters

“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.

Iron ore took a significant immediate hit after the announcement yesterday – with the price dropping 4.9 per cent to $US208.15 ($A276.68) a tonne this morning.

Benchmark iron ore futures on the Dalian Commodity Exchange plunged as much as 9 per cent to 1119 yuan ($173.14) per tonne on Monday, narrowing their gains to 30 per cent so far in 2021.

Finance commentator and anchor at Ausbiztv said the commodity is set for its largest decline since listing in the coming months.

Dalian iron ore Sept 2021 contract set for its largest decline since listing #ausbiz$AUDpic.twitter.com/JIrPnH3iY9

— David Scutt (@Scutty) June 21, 2021

The blow has come after spot prices had held strong at $200 a tonne over the past three weeks, despite the Chinese government’s efforts to rein in iron ore, which hit a record peak above $230 last month.

According to Reuters, iron ore prices have also been hit by a seasonal slowdown in construction activity in top steel producer and consumer China.

“It’s safe to say that China’s seasonal slowdown in construction steel demand has now arrived, with rebar inventories at steel mills and warehouses across China both showing firm builds,” Atilla Widnell, managing director at Navigate Commodities in Singapore, told the agency.

Overnight steel futures also fell, with rebar on the Shanghai Futures Exchange down 4.2 per cent. Hot rolled coil fell 4.3 per cent, while stainless steel slipped 0.6 per cent.

Despite the fall in the price of iron ore, it is still too high for Beijing’s liking. The CCP is looking to rapidly expand its scrap steel recycling industry and look to other parts of the world for its supplies.

Why China needs to drive iron ore down

Despite the tensions between Beijing and Canberra over the past year, China simply can’t stop buying our iron ore and it’s giving the Australian economy a much-needed boost.

In the first five months of the year, China snapped up 444.9 million tonnes of the stuff and – over 2020 – China bought 81 per cent of all the iron ore Australia shipped overseas.

China has been keen to point out that the eye-watering current cost of iron ore, created by global supply issues from other big producers like Brazil and China’s own insatiable demand for it, is harming Chinese businesses and driving costs up.

However, experts here have suggested there may be bigger issues at play.

David Llewellyn-Smith, the editor for Macrobusiness, said China needs to look elsewhere because its reliance on supplies from Australia has become untenable amid rising tensions in the world.

He sees the world effectively splitting into two trade blocs – a “liberal bloc” with the US at the head and an “illiberal” bloc with China at the head.

This currently puts Australia in a strange but powerful position, as China still relies so heavily on us for commodities like iron ore.

“In effect those two blocs are going to compete for geopolitical power and so China simply cannot have a commodity import that is so strategic in the wrong bloc as its supplier,” he said.

Iron ore’s price has hit eye-watering highs over the past month. Picture: Supplied

“This is a massive strategic veto Australia has over China. China says it’s going to invade Taiwan or does, and Australia cuts off the iron ore. Either we’d elect to do it or the US would simply plonk an aircraft carrier off the Pilbara and it would happen anyway.”

He said this means China has had a reason, like never before in its history, to get away from Australia.

“This is now a strategic vulnerability for China, so it’s essential and it’s urgent,” he said.

Given this urgency, he said China was “very angry” about how high the iron ore price is right now, despite its attempts to bring it down, and it is “humiliated” by its own trade war with Australia.

“Iron ore is just destroying China’s attempt to coerce Australia, because they just need it too much,” he said.