Back in July we explained just how difficult it is to manipulate commodities lower just by talking and selling from stockpiles.* In the case of iron ore, China used a few more of the tools from the toolbox.
From the South China Morning Post, September 22:
China’s curbs on steel production, pollution and energy consumption send iron ore prices tumbling
- Iron ore prices plummeted to just below US$100 a tonne last week, after hitting a record of US$235 a tonne in May
- The decline, which reflects efforts by Beijing to rein in raw material prices, has hit miners, investors and traders
Investors are fire-selling mining stocks, iron ore traders are losing money, and smaller miners are pulling back shipments because of falling iron ore prices driven by tumbling Chinese demand.
Even usual seasonal factors, such as lower Chinese steel demand ahead of winter, will have little impact on plunging prices that have sent the iron ore supply chain reeling, as the downward momentum caused by fundamental changes to China’s steel and iron ore demand gets under way, analysts say.
Iron ore, the darling of China’s post-pandemic economic recovery, is facing a reversal of fortunes, with prices sinking to just below US$100 a tonne late last week after scaling record heights of US$233 to $235 a tonne in May.
UBS issued repeated calls last week for investors to sell mining stocks, including those of Australian companies Fortescue and Rio Tinto.
“Prices have fallen more than 50 per cent since peaking in mid-May,” UBS equities analysts said.
“This reflects a sharper than expected slowdown in property activity in China thanks to tightening measures and the Evergrande risk of default impacting confidence.”
The price turnaround reflects Beijing’s success in its broader efforts to influence supply and demand for steel, which determine iron ore prices, as it pushes to reverse high raw material costs that have hurt businesses, especially for small and medium-sized steel producers....
....MUCH MORE
The first round of sales sort of fizzled, reminding us that it is not an easy task to manipulate prices.
The three distinct phases of what the Chinese did last time were:
1) Make the decision to sell the metals and experience front-running from some of the comrades at the table
2) Announce the plan to sell some inventory to test how much effect jawboning has
3) Release the metal onto the market
The problem the Chinese had in round I was that prices had already come down fast off the May 10 spike high when they made the announcement so that by the time the metal was put on the market participants were seeing it as a bargain compared to recent prices and absorbed the selling. We did get down to $4.08 but the action that morning looked more like someone getting liquidated by a margin clerk than a bunch of cathodes being offered down.
In some ways what the Chinese are trying to do is similar to a central bank trying to defend its currency: you have a limited amount of ammunition and can't just throw it into the market willy-nilly or you will run out. Just ask Malaysia and the BoE. All the central banks can do is attempt to guide the action that is unfolding. If they can catch the inflection points, the bankers get a magnified effect from their finite resources of foreign exchange. But it is so tricky: too early you waste your reserves, too late and the other side says thank-you for the supply. Just right and at best you amplify and accelerate where the market was going to go anyway. See also Warren Buffet's 1988 letter to the shareholders of Berkshire Hathaway for the denouement of most central bank forex campaigns: "He lied like a Finance Minister on the eve of a devaluation."*
That's enough intro, here's Bloomberg via Creamer's Mining Weekly, July 7:....
