China will take control of iron ore pricing in the next two years as rising supplies of the steelmaking commodity return bargaining power to buyers, former Noble Group Ltd. Vice Chairman Harry Banga said.
Prices of the second-biggest seaborne commodity will drop to $95 to $110 a metric ton, said Banga, who in May started The Caravel Group Ltd. Iron ore traded at $135.90 a ton at the Chinese port of Tianjin yesterday.
Mine expansions by producers including Rio Tinto Group and BHP Billiton Ltd. (BHP) will push the market into a surplus next year, and the 82 million-ton glut will be the most since at least 2008, Goldman Sachs Group Inc. said in August. The shift in bargaining power may also spur an expansion of the iron ore securities market in Asia, Banga said,
“Buyers will be calling the shots,” 63-year-old Banga, who has traded iron ore for almost 20 years, said in an interview in Hong Kong. “It will change very quickly over the next two years and the Chinese will then control more of the pricing.”
Banga, who left Noble in January after stepping down from an executive role at Asia’s largest commodity trader in 2010, started Caravel with his sons Angad and Guneet. Other than iron ore and shipping, the company plans to expand into trading of commodities including coal, manganese, and nickel, he said.
Contract volumes for iron ore securities traded may potentially reach twice the size of the almost 1.2 billion ton physical market as a new generation of overseas-educated managers at Chinese steelmakers will be more willing to use the contracts to hedge risks, Banga said.
Contracts traded on exchanges including the Singapore Exchange Ltd. and Dalian Commodity Exchange will account for about 130 million tons to 150 million tons this year, he estimated.
“The growth in the last three years itself is tremendous and it’s just the tip of the iceberg,” he said of the contracts.
Record iron imports by China, the biggest steelmaking nation, in September and gains in October don’t represent a reversal of the trend of slowing demand, Banga said. Mills are just stocking up ahead of the Chinese New Year holidays in January when trains will shift to moving passengers instead of cargo, he said.
The commodity has rallied 23 percent from this year’s low on May 31 and is up 57 percent from September last year when prices touched an almost-three-year low. Iron ore entered a bull market in July as China’s economy accelerated, spurring Standard Bank Group Ltd. and Australia’s Bureau of Resources and Energy Economics to increase price estimates in the past few weeks.
Caravel, which has traded 1 million tons of iron ore in the past month, is seeking volumes of 15 million tons in its first year of operations, Banga said. It wants to double trades to 30 million tons a year in three years’ time, or about 3 percent of China’s purchases, he said.
The group has hired more than 20 people for its iron ore team, he said. Banga, who raised as much as S$252 million ($202 million) by selling shares in Noble last November, no longer owns any stock of his former company, he said.