China can’t control its iron ore roller coaster

The nine most terrifying words in the English language, Ronald Reagan once joked, are “I’m from the government, and I’m here to help.” For anyone involved in commodity markets, there’s a still more alarming version: “I’m from the Chinese government, and I’m here to stabilise prices.”
That’s reason to be highly skeptical that Beijing’s plans to rein in the wild swings in the iron ore market will succeed. The government is developing a state-backed platform to coordinate all Chinese purchases of the steelmaking material, people familiar with the matter told Bloomberg News this week. In theory, that would give more bargaining power and stability to the country’s mills, which spit out more than half the world’s steel.
Good luck with that. In everything from metals to food, Beijing’s attempts to regulate the market prices of raw materials have more often failed than succeeded.
The policy is particularly misguided in relation to iron ore, though. Here the problem isn’t just that Beijing is incapable of controlling the winds and waves of commodity markets, as is the case with metals, pork and oil. In steel, it’s to blame for the tempest itself, thanks to whipsawing credit policies that veer between stimulus and deleveraging from one month to the next. Getting one arm of the state to clean up the mess caused by another arm of the state is never going to work.
Take a look at the direction of the steel market last year, for instance. Output in March was up by 19.1% from a year earlier, the biggest increase since 2010 and a volume of additional metal roughly equivalent to a year’s worth of steel production from the whole continent of Africa. That wasn’t just a rebound from Covid-era lows, either — production in March 2020 had only fallen 1.7% from the previous year.
This tidal wave of metal helped juice economic growth at a time when export demand from the rest of the world was looking weak, but as the year wore on it led to worries that China’s economy was veering out of control — both in the effects of all that construction spending on the heavily indebted real estate sector, and in the country’s ability to rein in polluting industry in the pursuit of its emissions-reduction goals. The hangover after the binge came in the second half of the year. At its worst in October, output was 23% down year-on-year, and over the entire second half the fall in steel production relative to 2020 came to about 85 million metric tons.

—Bloomberg