Fortescue Says China Curbs Help Damp Unhealthy Speculation

Updated on
  • Putting up transaction costs strongest government signal
  • Benchmark iron ore prices to remain stable: CEO Nev Power

China’s move to rein in a commodity trading frenzy is putting a brake on “unhealthy” speculation as regulators seek to prevent markets getting out of control, according to the head of the world’s fourth-largest iron ore producer.

“The strongest signal that the government sent was putting the transaction costs up, so that will naturally taper down a bit of enthusiasm in trading,” Fortescue Metals Group Ltd. Chief Executive Officer Nev Power told reporters Wednesday in Sydney. “We’ve been flagging for some time that we think it’s an unhealthy level of speculative trading.”

Speculators who traded $261 billion in Chinese commodities, including in iron ore, on a single day last month are stepping back after exchanges took steps to raise trading fees and shorten hours. Volume on the Dalian Commodity Exchange, Shanghai Futures Exchange and Zhengzhou Commodity Exchange have already declined in the wake of tighter rules since investors spent 1.7 trillion yuan on April 21 on everything from steel reinforcement bar to coal.

‘Difficult Balance’

“It’s a difficult balance,” Power said. “On one hand, the Chinese government want more market forces to drive the economy, and they’ve been encouraging those processes. But at the same time they don’t want it to get out of control. I think they’re playing a really good role of sort of mediating between the two.”

Iron ore futures in China have plunged more than 10 percent since last week after surging earlier in the month. The contracts on the Dalian Commodity Exchange fell as much as 3.5 percent to 427 yuan ($65.71) a metric ton in Shanghai.

Investors are probably moving out of commodities and raw materials producers in anticipation of further clampdowns by China to tame speculative trading, according to David Lennox, an analyst at Fat Prophets in Sydney. Commodities prices may move lower as investors seek to close out positions “under a stampede,” he said by phone.

Prices should remain stable with planned additions to supply well known to the market and as Chinese steel mills boost margins by reducing excess capacity and improving efficiency, according to Power.

“The iron ore price should trade in a reasonably tight band, unless there are other major changes in demand or in supply,” Power said on the sidelines of the Macquarie Australia Conference. “The market is pretty well aware of what’s coming, so you’d think it’s going to be reasonably stable.”

Fortescue declined 4.9 percent to close A$3.13 in Sydney, while Rio Tinto Group slumped 7.5 percent. BHP Billiton Ltd. tumbled 9.4 percent, the most since December 2008, after prosecutors in Brazil on Tuesday filed a 155 billion reais ($44 billion) civil suit against the producer, Vale SA and their Samarco joint venture over a deadly dam spill in November.

Iron ore with 62 percent content delivered to Qingdao declined 5.2 percent to $60.09 a dry metric ton on Wednesday, shrinking its advance this year to 38 percent, according to Metal Bulletin Ltd. Port inventories rose 1.2 percent to 98.5 million tons last week, the highest in more than a year, according to Shanghai Steelhome Information Technology Co.