“High and volatile prices are well and truly in the government’s spotlight. Their concentration has sharpened. “
Iron ore markets have been foamy in recent weeks, hitting record highs on speculative buying rather than strong fundamentals. On May 12, iron ore prices hit an all-time high of US $ 237.57 per tonne, but in less than two weeks they have fallen nearly 20 percent.
“We have long emphasized that the main risk with rising prices would be a reversal of bullish market sentiment and we are now seeing that reversal,” said Shaw.
Morgan Stanley said last week that iron ore prices had exceeded what could be explained by the fundamentals of supply, demand, inventory and marginal cost.
“China is very clearly warning participants, producers, consumers and speculators that it will not tolerate any speculation,” Shaw said.
“It is very clear that the government is absolutely cracking down now and the participants are showing us what they are thinking, voting with their feet and taking the risk off the table.
Beijing’s increased focus on speculation also hurt the profitability of the steel margin. Chinese steel mills profit margins stand at US $ 50 per tonne, up from US $ 265 per tonne two weeks ago.
Steel prices in China also weakened, with rebar falling 17.8% from its all-time high, while hot-rolled coils fell 18.6%.
“A spread of US $ 50 is still very good historically, but it’s going to weigh on iron ore prices and prices could go down further from here, no doubt,” Shaw said.
But iron ore fundamentals remain strong, and although prices have fallen sharply in recent weeks, they are unlikely to continue to tumble. “We may not see prices above $ 200 again, but I still suspect that prices will have short-term support,” Shaw said.
“The market is still very tight, so there should still be some sluggish prices. If steel spreads stay around current levels, there could be some downside to iron ore. “
It is still difficult to predict exactly where prices will move in the short term.
“Storage ports and steel inventories are down, and steel prices in the rest of the world are still high,” Shaw said. “But we also know that the Brazilian supply has been reduced, which is going to diminish at some point, so we will see more supply coming into the market. And we know that China’s credit momentum is already contracting. “