China's largest steelmakers have asked regulators to investigate iron ore prices that have rallied amid a global rebound in steel output that has outpaced raw material supply.
"The current rise in iron ore prices has deviated from the fundamentals of supply and demand and greatly exceeded the expectations of steel mills, and there are obvious signs of capital speculation," steelmakers Baowu, Shagang, Hebei Iron and Steel, Anshan Iron and Steel, Shougang, Valin Iron and Steel, and Jianlong Iron and Steel said in a statement released by the China iron and steel association (Cisa).
Cisa deputy secretary general Wang Yingsheng met with the steelmakers on 10 December.
The most active iron ore futures contract on the Dalian commodity exchange (DCE) rose above the 1,000 yuan/t ($153/t) level for the first time since the contract was launched in October 2013, with May closing at Yn1,042/t on 11 December. The contract fell to Yn966/t at the end of today's afternoon session, down by 7.3pc from the high.
"The iron ore market pricing mechanism has failed," the steelmakers said, calling on "the state administration of market supervision and the China securities regulatory commission to take effective measures to intervene in investigations in a timely manner and severely crack down on possible violations of laws and regulations."
The DCE has put a limit of 10,000 lots for new open interest and raised the margin requirement to 15pc from 11pc for the May iron ore contract in an attempt to limit speculative trading.
The Argus 62pc iron ore fines index rose to $160.30/dry metric tonne (dmt) on 11 December, putting it at its highest level since it was launched in May 2013 after rising by 17pc in December and by 76pc this year.
A disappointing recovery in iron ore supply from Brazil and weather delays in Australia have combined with record Chinese steel output to send China's iron ore port inventories falling into the end of the year. China's steel output slows during winter, but tight global steel supply has lifted Chinese exports and helped support domestic steelmakers' profit margins.
Cisa called for a probe into iron ore prices in 2019 after which futures and physical prices corrected sharply.
SGX swaps for January fell by $5.85/t to $151.55/t today, following the entire curve lower with 2021 swaps down by $6.65/t to $136.85/t.
"The rate of erosion of China's port stocks suggests the market is currently in an 80mn t/yr deficit, with price $50/t above its 'normal' level vs inventory. Clearly the market is pricing in more tightness to come, with speculative inflows on the Dalian and SGX exchanges driving the price higher, but we forecast a seaborne deficit of ‘just' 35mn t next year," US bank Morgan Stanley wrote in a note today.
