China’s Iron Ore Crackdown Sparks Rout as BHP Sees Price Support

(Bloomberg) — Iron ore plummeted as Beijing ramped up a campaign to stop prices overheating, prompting BHP Group Ltd. — one of the world’s top producers — to caution that supply and demand will determine prices.

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Prices tumbled as much as 13% in Singapore on signs that authorities in China will intensify efforts to quell a big rally since mid-November. Several iron ore companies received a warning about speculation and hoarding at a meeting with regulators in Beijing, while the official China Daily newspaper railed against what it called “guerrilla war” by speculators in China and outside.

The fresh regulatory attention highlights a difficult balancing act for Beijing, which wants to steady the economy — boosting steel consumption — without reprising last year’s damaging bout of commodity inflation. Iron ore’s demand prospects look robust, according to Mike Henry, Chief Executive Officer of BHP, the No.3 global iron ore supplier.

“At the end of the day, the iron ore price will be determined by supply and demand,” Henry said in a Bloomberg TV interview, answering a question about Beijing’s efforts to cool prices. “Given the strong outlook we see on the demand side, plus some of the supply-side constraints, we think that will provide a measure of support to pricing.”

Iron ore had risen more than 60% from mid-November to smash through $150 a ton last week, triggering initial actions by regulators including port checks, higher futures trading fees and a warning against disinformation.

“The government’s rhetoric on cracking down on iron ore prices is expected to drive trading for the near term as the market awaits more specific measures,” Wei Ying, an analyst with China Industrial Futures Ltd., said by phone.

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On Tuesday, some Chinese iron ore trading firms were summoned to a meeting with a trio of powerful government departments — including the markets regulator, the economic planning agency, and the securities regulator — to discuss “abnormal” prices. The companies were warned against hoarding and speculation, according to an official statement.

And an editorial in the English-language China Daily urged stronger steps to stabilize prices as the government boosts cyclical demand including infrastructure spending. The paper blamed “domestic and foreign capital” for fueling speculative price gains.

Futures on the Singapore Exchange were down 8.8% at $134.05 a ton by 4:16 p.m. local time. On China’s Dalian Commodity Exchange, prices closed down 10% at their daily limit.

Like BHP, some analysts also question whether efforts to rein in prices can have lasting impact if the physical market tightens further.

“History has taught us that these sharp plunges after Chinese rhetoric on investigating and supervising iron ore prices are short and temporary,” said Atilla Widnell, managing director at Navigate Commodities. A fall in supplies from Australia and Brazil — together with rising steel production — have created a very finely balanced market, he said.

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By Matt Earle

Matthew Earle is the Founder of MiningFeeds. In 2005, Matt founded MiningNerds.com to provide data and information to the mining investment community. This site was merged with Highgrade Review to form MiningFeeds. Matt has a B.Sc. degree with a minor in geology from the University of Toronto.

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