The age when the world’s most prominent and prestigious miners and steelmakers would meet secretly to determine the price of iron ore has ended.
Now, the Dalian Commodity Exchange in northeastern China has created a frenzy of investment activity in iron ore futures.
Part of the reason that iron ore has been responsible for a rise in bets in Chinese stocks is the fact that iron ore allows for real-time prices. The prices are therefore more visible and easier to track.
A Steep Rise in the Prices of Iron Ore
In spite of an iron ore glut in 2016, the iron ore futures traded on the Dalian Commodity Exchange have been on the rebound since January. In fact, real iron ore prices have increased a whopping 52%.
On April 21, prices reached $68.70 per metric ton—the highest in fifteen months.
However, with the steep rise in the price of iron ore many regulators and producers in China have begun to worry about the speculative frenzy.
Iron Ore is a Powerful Force, Thanks to High Trade Volumes
In April alone, approximately $330 billion of iron ore futures were traded on the Dalian Commodity Exchange. That is over twice as much as the monthly turnover in February 2016.
The huge trade volume is also about four times as much as the amount spent in a year on international businesses of physical iron ore.
Meanwhile, the climbing iron ore prices have also contributed to increasing steel prices worldwide.
Steel Prices Soar
The rising prices of steel are linked to a high demand for steel rebar. Rebar is a useful aid for strengthening concrete, so there is a huge demand for steel in construction.
On Thursday, more than 223 million metric tons of steel rebar were exchanged in trade. The frequency in trade of steel rebar futures puts it in the top three contracts that are most traded in the world, based on dollar volume—behind only the oil futures of New York and London.
Other related metal products have seen similar growth, such as:
- Hot rolled coils (made using steel)
The growth in prices has been most remarkable for iron ore and steel prices, though. However, those increased prices do not come without risks.
Parallels to a 2015 Stock Market Crash Cause Concern
Hedge funds and retail investors are among the many groups betting on China’s commodities futures. But this flurry of activity has many analysts worrying about a repeat of last year’s major stock market crash.
Some analysts had noted that the boom in 2015 seemed just as promising—before it eventually ended in a devastating stock market crash with estimated losses of about $5 trillion.
Given last year’s crash, it is no surprise that some analysts are getting a bit worried. Citigroup analysts have expressed particular concern about the stability and sustainability of the commodities futures markets.
Measures to Curb Speculative Trading
In light of the speculation currently sweeping commodities futures markets, the Chinese securities regulator has called for exchanges to rein in speculative trading.
The Dalian Commodity Exchange has responded with several concrete steps to curb speculative trading:
- raising transaction costs
- increasing deposit requirements for investors
- tightening restrictions on business practices (like frequency of submission and frequency of order withdrawals)
- building iron ore margin requirements
Similarly, the Shanghai Futures Exchange and Zhengzhou Commodity Exchange have also increased fees, implemented heightened monitoring, and issued warnings to investors.
All of these measures to curb speculative trading are intended to help regulate the market by enforcing restrictions on illegal business practices, reducing risks, and stabilizing the market.
Results of Regulation Efforts
Since Dalian took action, iron ores have fallen already by 5.4% on Wednesday. Meanwhile, the Dalian Commodity Exchange reported Thursday that it issued warnings to over 200 clients who violated trading rules.
Dalian also reports that it banned over ten investors from trying to open temporary positions.
All of these measures aim to prevent the stock market crash in Shanghai and Shenzhen last year.
China’s Role as a Leading Consumer
China holds the status of the world’s leading consumer of metals—including copper and aluminum. In fact, the country buys over 60% of internationally traded physical iron ore!
As a result, other countries pay attention to the way that demand plays out in China. Chinese iron ore futures are a sign of how the power to price commodities seems to be shifting from the West to the East.
Will Iron Ore’s Success Last?
Iron ore was not traditionally a market with many opportunities. Until recently, a few influential producers like BHP Billiton controlled the entire market.
Now, companies have created an iron ore futures market that allows traders to prospect swiftly and frequently, thanks to greater visibility and real-time prices.
Going forward, however, many analysts—like those at Citigroup—urge investors to heed regulators’ warnings. Some, like Morgan Stanley, believe the iron ore market will continue to surge.
Others, like Australian Fortescue Metals Group Ltd’s chief executive, Nev Power, warn that investors should remember the unpredictable nature of the market.