Australia’s Fortescue Metals Group expects iron ore prices to stabilise finally as China walks a fine line to curb market speculation that has triggered a recent run-up in iron ore futures, the miner’s chief executive said.
Iron ore has galloped up 45 percent so far this year, after contracting by just as much over 2015, as everyone from professional investors to students bet on a seesawing market on platforms such as the Dalian Commodity Exchange.
There were about $330 billion in iron ore futures trades on the exchange in April, where turnover was up 186 percent from April 2015.
“The Chinese government wants more market forces to drive the economy and they are encouraging those processes,” Fortescue CEO Nev Power said.
“But on the other hand, they do not want it to get out of control,” he said.
The China Securities Regulatory Commission said it would not allow the futures market to become a “hot-bed” for speculators and last week urged domestic commodity exchanges to curb excessive speculation.
“That speculative trading had become very high volume and that is not in the best interest of the industry,” Power said, adding that Fortescue welcomed China’s efforts to cool the markets.
Power said trouble started in 2010 when iron ore miners and buyers switched from fixing prices once a year to index trading.
“Dalian came on with the intent of providing a market for users and producers to get price certainty … Instead it’s become quite a speculative market,” he said.
“We are pleased to see the Chinese government starting to say this is not designed to be a highly speculative exchange. We want producers and users to be the main participants,” he said.
Power said he expected some volatility to continue in iron ore trading, but because much of the world’s higher cost production was eliminated by last year’s low prices, supply and demand fundamentals were starting to exert greater influence.
Power said Fortescue, the world’s fourth-biggest iron ore miner, was digging and shipping ore at an average cost of around $30 a tonne, about half the current benchmark spot price. .IO62-CNI=SI
That puts Fortescue’s costs near par with those of its three bigger competitors, Vale, Rio Tinto and BHP Billiton.
Power said cheaper freighter rates due to lower fuel prices were partly responsible for lowering the company’s operating costs.
“Twelve months ago the cost to ship iron ore from Australia to China would have been $8 or $9 a tonne, but recently it’s been below $3 and is now still only $4.50 a tonne,” he said.