China throws a tantrum over surging iron ore prices

Iron ore prices on China’s Dalian Commodity Exchange (DCE) hit a limit down of -10% on Tuesday as local regulators vowed to stabilise prices. 

This reverberated throughout local iron ore stocks, notably Fortescue (ASX: FMG). 

Sustained selling pressure drove Fortescue shares from a -1.6% open to a -5.1% close on Tuesday.

China’s National Development & Reform Commission (NDRC) and State Administration for Market Regulation (SAMR) are investigating major iron ore participants, instructing them to verify information and avoid spreading rumours that could impact prices.

The market watchdogs warned that market participants will face severe punishments if found spreading misinformation.

Sound familiar?  

This isn’t the first time China upped the regulatory ante in response to soaring commodity prices. 

The same regulatory bodies summoned major companies across iron ore, steel, copper and aluminium sectors in May last year, urging them to safeguard price stability. 

The news drove similar selloffs on the DCE, with iron ore prices hitting limit downs of -10%. 

Back then, iron ore prices briefly cooled from May highs of over US$220/t to lows of US$180/t by late-May, only to rebound back above US$200 a few weeks later. 

A tantrum over natural market forces 

Could malicious trading and suspicious pricing behaviours be taking place in China?

It's possible. 

Iron ore transactions can be conducted in closed-door negotiations across various buyers and sellers using different currencies and ore grades. 

That said, China seems to stamp its foot only when prices are high.

At the end of the day, benchmark indices like S&P Global Platts and NYMEX, used by steelmakers, traders and mining companies globally can verify recent prices.

China's regulatory move has weighed on iron ore sentiment, but like all commodities, prices are determined by supply and demand.