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China’s Crackdown On Speculative Trading Could Impact A Key Metal Market

The price decline of iron ore appears short-lived as the Chinese government cracks down on speculative trading. This has led many market analysts to forecast a rise in ore prices in the coming months.

Fitch, in its latest report, has expressed optimism due to Chinese demand for iron ore. The reporting agency believes ongoing supply constraints and fresh demand would eventually combine to restore market equilibrium.

Rising iron ore forecasts

Based on current market conditions, Fitch Solutions Country Risk and Industry Research now joins some of its peers in revising its 2022 iron-ore price forecast upwards. The company believes prices will go from US $90 per ton to $120 per ton. In addition, both JP Morgan and Macquarie also upwardly revised their ore forecasts for 2022 according to a recent report from The West Australian.

China’s state planner, the National Development and Reform Commission (NDRC) recently announced that teams would investigate the commodity exchanges and major ports. The investigation included an examination of iron-ore inventories, along with trading practices in the spot/futures markets. That triggered a downward spiral of iron ore prices and futures. It also led to the Dalian bourse doubling transaction fees on some iron-ore futures contracts starting from February 16.

From US $150 a ton in early February, the crackdown on speculative trading led a price decline to about US $120 per ton, on negative investor sentiment. Dalian iron ore touched a new low not seen since February 2020 last week declining for the 5th straight session.

Why did Fitch upwardly revise their iron ore price forecast?

The answer lies in Fitch’s own report. Fitch appears positive because China’s domestic demand for iron-ore itself would increase in the coming days. The Chinese administration will likely add its financial muscle to the economy in 2022.

Related: 5 Commodities That Could Explode As The Ukraine Crisis Escalates

In addition, Bloomberg reports that the Chinese government contemplated routing all purchases of the steelmaking material through a single state-backed platform. Quoting sources familiar, the report said the platform remains in development.

The state to run iron ore purchases on its own platform

The state-run platform will eventually replace the current system of steel mills negotiating spot purchases independently. The plan for the state-run platform includes both the stabilization of iron ore supply and prices.

Last week, the National Development and Reform Commission had asked iron ore traders to release excess inventory, and to reduce stocks to “reasonable levels.” This move came after a joint investigation with the market regulator in Qingdao, which serves as one of the country’s biggest iron ore ports. Not surprisingly, Qingdao had large stockpiles of ore. This led to allegations of hoarding to push up prices.

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China’s steel industry has always complained of iron ore market manipulation by a few giant international mining companies. Experts now believe that the new steps, initiated by the Chinese authorities, will curb that influence. All eyes will watch the stimulus measures that the Chinese government has promised to roll out soon.

Let’s see if this reboots steel demand.

By AG Metal Miner

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