China is investigating the cause of a steep rise in imported iron ore prices in an effort to “crack down on abnormal behaviour”, an industry association official said on Friday, causing prices for the steelmaking ingredient to tumble.
Qu Xiuli, the deputy chair of China’s Iron and Steel Association, told a conference in Shanghai on Friday that “relevant departments” were looking into the recent jump in prices, according to Chinese state media reports.
“The drop in steel prices and the rise in iron ore prices have meant that the level of [Chinese] steel company profits has continuously declined and become hard for companies to digest,” Ms Qu said.
China is the world’s largest steel producer and news of the probe sent iron ore prices in China down 4 per cent and also hit shares of the world’s largest miners, Rio Tinto and BHP Billiton.
Prices for iron ore surged to a five-year high of more than $126 a tonne this week amid a recovery in Chinese steel demand and lower supply from Brazil and Australia. On Friday, they fell to $114 a tonne, according to Platts.
Colin Hamilton, an analyst at BMO Capital Markets in London, said: “They’re sending a warning sign to financial markets that they don’t want to see some of the aggressive moves continue.
“No doubt the steel industry has given them a pushback as they’ve seen their competitiveness on a global basis diminish due to the iron ore price rise.”
Paul Gait, an analyst at Bernstein, estimated that global iron ore production fell by 17 per cent in the first quarter, from the previous quarter, to 273m tonnes due to the impact of a deadly dam collapse in Brazil and tropical cyclones in Australia.
The collapse of a waste dam at mining company Vale’s Córrego do Feijão iron ore mine in southeastern Brazil in January unleashed a wave of sludge that left more than 240 dead.
This week Brazilian authorities recommended a blanket ban on all tailings dams, which hold waste rock extracted from mines. Congressional authorities also recommended that 12 former and sitting executives from Vale be indicted for their roles in the disaster.
Analysts at JPMorgan said they expected demand for iron ore to outstrip supply by 100m tonnes this year, adding further support to prices.
To counteract higher prices, China could limit credit to smaller steel producers to stop them buying iron ore, Mr Hamilton said. But steel production in China is already falling which was likely to damp prices, he added. “I think we’ve probably seen the high in iron ore.”
Shares in Rio Tinto fell by 3 per cent on Friday to trade at 4,780p while London-listed shares of BHP traded down 2.3 per cent at 1,965p.
With assistance from Neil Hume in London