China Can’t Control Its Iron Ore Roller Coaster
https://www.bloomberg.com/opinion/authors/AQrSL0m_2u4/david-fickling
David Fickling - Bloomberg
Attempts to rein in this market are unlikely to succeed. Just like Beijing’s other failed efforts to regulate commodity prices. The nine most terrifying words in the English language, Ronald Reagan once joked, are “I’m from the government, and I’m here to help.” For anyone involved in commodity markets, there’s a still more alarming version: “I’m from the Chinese government, and I’m here to stabilize prices.”That’s reason to be highly skeptical that Beijing’s plans to rein in the wild swings in the iron ore market will succeed. The government is developing a state-backed platform to coordinate all Chinese purchases of the steelmaking material, people familiar with the matter told Bloomberg News this week. In theory, that would give more bargaining power and stability to the country’s mills, which spit out more than half the world’sGood luck with that. In everything from metals to food, Beijing’s attempts to regulate the market prices of raw materials have more often failed than succeeded. Midway through last year, the government released stockpiles of copper, aluminum and zinc to calm a price surge. Here’s what happened:
It’s a similar story with pig meat, where the establishment of a national pork reserve in the 2000s to reduce the swings of the market has, if anything, made price volatility worse. (In case you think China is alone in this self-destructive behavior, consider that West Texas Intermediate crude is up about 17% since Nov. 23, when President Joe Biden tapped from the U.S. Strategic Petroleum Reserve to lower prices.)The policy is particularly misguided in relation to iron ore, though. Here the problem isn’t just that Beijing is incapable of controlling the winds and waves of commodity markets, as is the case with metals, pork and oil. In steel, it’s to blame for the tempest itself, thanks to whipsawing credit policies that veer between stimulus and deleveraging from one month to the next. Getting one arm of the state to clean up the mess caused by another arm of the state is never going to work.Take a look at the direction of the steel market last year, for instance. Output in March was up by 19.1% from a year earlier, the biggest increase since 2010 and a volume of additional metal roughly equivalent to a year’s worth of steel production from the whole continent of Africa. That wasn’t just a rebound from Covid-era lows, either — production in March 2020 had only fallen 1.7% from the previous year.
This tidal wave of metal helped juice economic growth at a time when export demand from the rest of the world was looking weak, but as the year wore on it led to worries that China’s economy was veering out of control — both in the effects of all that construction spending on the heavily indebted real estate sector, and in the country’s ability to rein in polluting industry in the pursuit of its emissions-reduction goals.The hangover after the binge came in the second half of the year. At its worst in October, output was 23% down year-on-year, and over the entire second half the fall in steel production relative to 2020 came to about 85 million metric tons. That change alone is equivalent to the annual output of the entire U.S. steel sector.It irritates Beijing that its industrial stimulus policies have led to a decade of windfall profits for BHP Group, Rio Tinto Group, Vale SA and Fortescue Metals Group Ltd. — the four companies that supply about three-quarters of the iron ore traded by sea. Rio Tinto’s iron ore unit contributed $27.5 billion in Ebitda last year, the company said Wednesday, nearly three-quarters of the group total.
There’s not much the Chinese government can do about that, however, given that its own domestic resources of iron are so low-grade that they’re barely distinguishable from dirt. Attempts by Chinese companies to develop a new source of supply in Guinea are still years away from production and hostage to its volatile politics. A drive to recycle China’s growing mountain of scrap metal to supplement ore supplies is still far from making more than a dent in demand.For most miners, those facts lead to a simple calculation: The Chinese government wants economic growth, and that still requires stimulus to heavy industry, which will be bullish for iron ore imports. Promises of deleveraging will be discounted accordingly.“The market is in good shape,” Peter Cunningham, Chief Financial Officer of Rio Tinto Group, said in an interview after annual results Wednesday. “All the times we try and look through these temporary oscillations and look at the fundamental drivers of what’s happening, that gives us confidence.”Credit woes, like the run of defaults now coursing through China’s real estate industry, are always going to lead to fears that this roller-coaster ride is finally running out of track. It’s Beijing’s indecisiveness about whether to deflate or reflate its construction bubble that leads to the chaos in the iron ore market. If it wants to damp the volatility in iron ore prices, it should stop fretting about the mote in the mining sector’s eye, and consider the steel beam in its own. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners
(20min delay)