Last week, iron ore prices reached a record five-year high before falling almost 4% on Friday.
It’s thought that the Chinese Government could act on complaints of Market manipulation by Futures traders from Chinese steelmakers who claim their profit margins are tightening.
According to the Australian Financial Review (AFR), a top official on behalf of China’s steel industry said Beijing was getting ready to crackdown on soaring prices.
Iron ore market has also been hit by supply disruptions, as weather plagues supply chains. Last month Rio Tinto cut production outlook after issues with its mine, adding further to supply shortages.
Chinese demand crucial for iron ore prices
But some analyst believe that the current hype is only short-term, as US/China trade tensions could impact Chinese manufacturing.
Soaring iron ore futures propelled Aussie trade surplus $5.7 billion in May, with exports to China increasing 18%.
AFR said China’s continued demand for Australian iron ore exports is vital to achieve ‘the first current account surplus since 1970s’.
Traders in China said the act would not affect demand for iron ore in China, but that an investigation would most likely lower prices.
Last Friday, Vice President of the China Iron Steel Association (CISA), Qu Xiuli announced that the necessary department within China’s government would handle the investigation into iron ore’s recent price hikes.
‘Ms Qu stated there was a “distorted” relationship between the price of steel and iron ore.
‘CISA said steelmaking profits has fallen 18.2 per cent for the five months of the year compared to a 19.1% increase in imported iron ore prices’.
It’s important to remember that along with this, miners are enjoying lower freight costs form global trade slumps and cheaper oil prices.
Chinese investigation to hurt Iron ore price?
For the first time in almost twenty years, Australian iron ore exports are expected to drop, on the back of bad weather and output setbacks, according to the federal government.
If everything is left up to China’s demand in iron ore, then Australia’s biggest export market might have some challenges up ahead — as Chinese demand is set to reach its peak, analyst say.
This is off the back of the slowdown of the world second biggest economy.
‘Iron ore demand is near its peak. There is very limited growth potential for China’s iron ore demand,’ Xu Xiangchun, chief information officer for MySteel, said.
Commonwealth Bank Commodity analystt Vivek Dhar cautions over-confident investors forecasting iron ore prices are set to drop. After the cost of operations goes back up and as china’s economy continues to slow. As reported by the ABC:
‘We expect prices after July, so in August, to come off and that is going to happen as margins come off in China, and as we see more supply come back online,’ he said.
More to come.
For Money Morning
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