IRON ore, one of the hottest commodities in the early days of the raw materials rally, has now become the most volatile as bulls and bears joust over the trajectory of prices. In a series of wild swings, the ore that fuels China's vast steel industry surged to a record, collapsed into a bear market and then returned to a bull market in the space of about a month. Its gyrations in the past 30 days mark the mineral as the most volatile of the two dozen most traded commodities around the world.
Iron ore is being buffeted largely by confusion over how government policy will affect demand from steel mills in top consumer China. China wants to cut steel production but control prices, and to reduce investment but maintain employment, said Tomas Gutierrez, an analyst at Kallanish Commodities. "As policy shifts to keep the desired balance between these goals, the outlook for steel will improve or worsen accordingly," he said. China has revived an economy that cratered during the pandemic by turning to fiscal stimulus and monetary easing. That has meant churning out enormous amounts of steel to feed a property and infrastructure boom. As a result, iron ore prices have more than doubled over the past year. Now, the pressure is on to contain the inflationary pressures that has created, which means tighter credit and a moderation in spending on construction.
Added to the mix is Beijing's attempt to chart a course to the carbon-neutral economy promised by President Xi Jinping last year. That would involve producing a lot less of the alloy, which contributes 17 per cent of national carbon emissions, according to Goldman Sachs Group. Officials will spend the next month fanning out across the country to check on capacity curbs.
Bets on how these contrary policies could play out has whipsawed the iron ore market, which typically moves in lockstep with steel. The benchmark futures contract in Singapore topped out at a record US$233.75 a tonne on May 12. Two weeks later, it had fallen to US$170.50 - although that's still more than double the average since trading began in 2013. There's not much room for iron ore to rise anymore, said a Singapore-based futures trader. China has started credit tightening and that signals commodity prices should fall, he said.
Source : https://www.businesstimes.com