LAUNCESTON, Australia, Dec 4 (Reuters) – The two main iron ore spot prices diverged last week, with contracts traded in Singapore rising but China's domestic futures falling.
The two benchmarks generally move in lockstep but can diverge, particularly when Beijing expresses displeasure with price increases in key raw material steel, as it has done in recent weeks.
However, the rise in Singapore exchange contracts shows that Beijing may be pushing in the sense that it can squeeze domestic investors for a while but will struggle to contain international prices, especially if there are fundamental reasons supporting higher iron ore prices.
The first-month Singapore contract ended at $132.60 a tonne on December 1, up 1% for the week and the highest close in 18 months.
Front-month futures on the Dalian Commodity Exchange ended last week at 969 yuan ($135.71) a ton, down 0.8% this week, the first weekly loss after seven straight gains.
The drop in Dalian contracts, while modest, shows some nervousness among China's domestic traders over several measures aimed at curbing iron ore's rally.
The exchange said on November 30 that it would further strengthen its supervision of iron ore futures to maintain what it described as the safe and stable functioning of the market.
The move came after China's state planner said on November 24 that he would strengthen monitoring of iron ore at ports and protect against hoarding and speculation.
The National Development and Reform Commission also said it would tighten supervision of spot and futures markets in response to a “continuous and rapid” rise in iron ore prices.
Dalian futures have been in a sustained uptrend since closing at 587.5 yuan per ton on May 25, gaining 65% since their weakest close so far in 2023.
The rally appears to be at odds with weakness in China's key real estate sector, which is struggling with weak prices and liquidity problems among major developers.
However, due to efforts to boost the sector and some signs of improvement, some confidence has returned to the iron ore market as new house prices in China rose slightly in November, recording a third monthly gain.
But despite the real estate sector's difficulties, China's iron ore imports have been relatively robust so far in 2023.
RISING IMPORTS
In the first 10 months of the year, official customs data shows imports of 975.84 million tonnes, an increase of 4.64% compared to the same period in 2022.
Arrivals are also likely to have been strong in November: commodities analyst Kpler recorded imports of 103.82 million tonnes, while LSEG data is less optimistic at 96.72 million.
Overall, it can be assumed that imports in November will be approximately at the level of the customs value in October of 99.39 million tonnes.
Another positive factor is the level of inventory in China's ports. Data from consultancy SteelHome shows inventories stood at 110.7 million tonnes in the week to December 1.
This was up from the previous week's 108.5 million tonnes, but it is worth noting that inventories are well below normal levels for this time of year and only slightly above the seven-year low of 105.15 million recorded in the week ending October was recorded. 20.
In the same week last year, iron ore inventories were 137.5 million tons and in the same week in 2021 they were 155.4 million.
The depleted inventories suggest iron ore imports could remain at robust levels in the coming months, particularly as steel mills and traders gain more confidence that the worst is over for the real estate sector.
Overall, both fundamentals and sentiment have shifted in favor of iron ore in recent weeks, and the only thing standing in the way of higher prices, or at least maintaining recent gains, is stronger action from Beijing.
History shows that authorities can reduce iron ore prices, but only for a relatively short period of time, particularly if market conditions support higher prices.
The opinions expressed here are those of the author, a columnist for Reuters.
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