Iron Ore Prices Are Capped by Ample Supply, Weak Demand and Regulation Intervention

SHANGHAI, Mar 4 (SMM) - Intraday iron ore futures recorded a gain of nearly 9% or 818.5% in the last trading day before correcting, and the contract closed the day with a growth of 6.83%. Overnight iron ore futures slowed down its increase, and rose by 2.78% as of the close today.

On the policy front, the central government has been frequent in issuing regulating measures to constrain the iron ore prices:

On February 8, the National Development and Reform Commission and the General Administration of Market Supervision interviewed relevant iron ore information enterprises, requiring that no false price information or false price hike information should be fabricated and published, and price gouging is strictly forbidden.

On February 11, the National Development and Reform Commission Price Department, the General Administration of Market Regulation Price Supervision and Competition Bureau intends to send a joint research team to some commodity exchanges, key ports to carry out iron ore market supervision and research in the near future.

On February 15, the Price Department of the National Development and Reform Commission, the Price Supervision and Competition Bureau of the General Administration of Market Regulation, and the Futures Department of the Securities and Futures Commission recently held a joint meeting to remind and caution relevant enterprises not to hoard, not to maliciously speculate, and not to inflate prices.

On February 17, the National Development and Reform Commission and the General Administration of Market Regulation went to Qingdao to carry out joint supervision and research of the iron ore market. In order to have a comprehensive understanding of the changes in iron ore inventories at Qingdao port, a special meeting was held to remind and caution some iron ore trading enterprises to release excessive stocks and restore them to a reasonable level as soon as possible.

On February 23, the National Development and Reform Commission and the General Administration of Market Regulation jointly held a special meeting to study how to prevent blind iron ore hoarding.

On February 28, the price department of the National Development and Reform Commission, the finance and treasury department and the price supervision and competition bureau of the General Administration of Market Regulation went to the Dalian Commodity Exchange to carry out joint research.

Nonetheless, iron ore prices still managed to grow in the face of pressures, SMM believes that the reasons are as follows:

First of all, the recent Russia-Ukraine conflict has been escalating, and the iron ore exports from these two countries are affected. In addition, the mainstream steel mills in the two countries have suspended the supply of steel, which may increase China's exports of hot-rolled coil, subsequently raising the demand for iron ore. As such, iron ore prices rose on optimistic market sentiment.

In addition, the shipments from Australia and Brazil have been constantly low owing to the seasonal factor, especially the rainstorm in Brazil that affected iron ore transportation. As such, iron ore arrivals in China have been low for quite some time.

Lastly, the production restrictions in Tangshan were less than expected during the Winter Paralympic Games and Two Sessions. The relative authorities in Tangshan issued the detailed environmental protection measures for March 3-5, and only some sintering capacities were suspended, which had little impact on the output of pig iron. Therefore, the long-term outlook of iron ore demand is still optimistic.

The current daily pig iron output across steel mills in China has been less than 2.1 million mt, and is unlikely to increase significantly due to the Winter Paralympic Games and Two Sessions. Meanwhile, the port inventory of iron ore is still as high as 150 million mt. In other words, iron ore carries poor upside momentum in light of ample supply and weak demand.

To sum up, SMM believes that iron ore prices may correct amid high supply, weak demand and frequent regulation intervention, and are expected to hover at a high level recently.