The price of iron ore for decades was hammered out in secret talks between the world’s biggest miners and steelmakers.
Now, the dominant force is an obscure commodities market in northeastern China, a stark example of how pricing power for everything from steel to copper is shifting east.
The change has been driven by Chinese investors who have poured billions of dollars into iron-ore futures traded on the Dalian Commodity Exchange. Their bets, reminiscent of last year’s frenzy in Chinese stocks, have generated as much dollar volume as gold futures in New York, according to data from Citigroup Inc. They also have created something that had never existed before in the clubby market for iron ore: visible, real-time prices.
Those prices are surging. Despite an expected glut of iron ore in 2016, Dalian iron-ore futures have climbed 46% since the start of the year. Prices for physical iron ore have risen 52%, reaching a 15-month high of $68.70 a metric ton April 21. On Friday, the physical commodity traded at $65.20 a ton, while the most active contract on the Dalian exchange settled at 462 yuan ($70.36) a ton.
The price climb has sparked concern among Chinese regulators and iron-ore producers alike. They fear the speculative frenzy is creating a bubble and volatile conditions that make hedging difficult. Even so, the magnitude of the futures market is proving hard to ignore.
“The volumes that are being traded are so high that they swamp the physical market and are going to be a massive influence on it from now on,” said Nev Power, chief executive of Australia’s Fortescue Metals Group Ltd., the world’s No. 4 exporter of iron ore. “The negative side is the volatility we have seen: It makes it very difficult to predict what the price is going to be going forward.”
About $330 billion of iron-ore futures traded in Dalian in April, more than double the monthly turnover as recently as February and roughly four times the amount spent trading physical iron ore internationally in a year.