Chinese mills scrutinise iron ore price mechanisms

China's largest steel mills have formed a group to investigate non-market factors that may be contributing to the rise in iron ore prices, including the role of some spot market pricing mechanisms.

Executives from eight steel producers China Baowu, Angang, Sinosteel, HBIS, Jiangsu Shagang, Ma'anshan, Valin and Shandong Steel met at the China iron and steel association (Cisa) in Beijing on 27 June, according to minutes of the meeting that were circulated in the market.

The group called on Chinese government ministries, departments and Cisa to investigate iron ore paper and physical markets, which the group blames for exaggerating the effect of recent supply shocks in lifting iron ore prices to five-year highs.

Mining firms have cut more than 100mn t from this year's production guidance following Brazilian mining firm Vale's fatal Feijao dam accident and Cyclone Veronica that hit Western Australia's Pilbara region in March. But the last wave of price increases since May has outstripped the supply-demand balance, the minutes said. The group "pointed out that the recent iron ore market price has risen sharply and there are non-market factors."

The Argus 62pc ICX index has risen by 63pc this year to $117.80/dry metric tonne (dmt) yesterday, with its most recent high of $125.20/dmt on 3 July the highest since January 2014.

Cisa has called for an investigation of futures markets, as well as into the pricing methodology used by S&P Global Platts. Mills "generally reflect that there is a difference between the Platts index and other mainstream index preparation methods," the minutes said. S&P Global Platts competes with Argus in providing pricing information.

The group asked Cisa and government agencies to communicate with index providers to study and analyse market conditions before making conclusions.

Chinese steel mills and mining firms have called for the use of more iron ore indexes to support healthy price formation. Rio Tinto sold its first cargo using a basket of indexes in March 2019, joining fellow UK-Australian mining firm BHP that was the first main producer to use a basket of Argus and TSI in 2014.

The minutes of the meeting will boost the use of baskets in indexation, which will "safeguard the rational and reasonable price making," a Beijing-based mill trader said.

"We welcome the use of baskets of indices that Cisa has promoted," a south China mill official said. "I think basket prices can be more transparent and correct."

The release of the minutes last week led to a two-day price correction in futures and seaborne indexes. The Argus ICX fell by 6.2pc and the most active iron ore futures contract fell by 8.7pc over 4-5 July. Iron ore prices have rebounded this week, with the most active iron ore futures contract closing today at 880.50 yuan/t, 3pc below the Yn908.50/t close on 3 July.