On June 8, 2020, it was reported that recently, iron ore has surged again due to the COVID-19 outbreak in Brazil, becoming the focus of the financial market. The market seems to be repeating last year's myth. Opinions are divided, and there is no consensus. Is it the main capital's precise control, or is there a malicious manipulation behind the scenes? This article attempts to reveal the truth behind the matter by collecting market data and news from various channels, and analyzing and refining it objectively.

First of all, the recent sharp rise in iron ore futures prices has seriously deviated from the market fundamentals, disrupting the market price order and violating the laws of market economy.

As of the night market close on June 5, 2020, the main contract price of iron ore for 2009 was 760.0 yuan/ton, an increase of 218.0 yuan/ton or 40.22% from the intraday low of 542.0 yuan/ton on April 2. If considering the intraday high of 775.5 yuan/ton on June 1, the cumulative increase is as high as 232.5 yuan/ton or 42.90%. In contrast, the maximum cumulative increase of the cultural commodity index during the same period was only 10.89%, and the maximum cumulative increase of the rebar main contract for 2010 was only 18.56%. The increase in iron ore prices is severely deviating from the increase in the comprehensive index of bulk commodities and the representative variety of black series products, rebar, indicating a significant presence of unreasonable capital speculation.

At the same time, recent statements from the China Iron and Steel Association, the Ministry of Industry and Information Technology, and steel companies have expressed that the current high prices of iron ore are unreasonable.

On March 15, the vice president of the China Iron and Steel Association, Luo Tiejun, stated in an interview that the current trend of the iron ore index is obviously deviating from the supply and demand fundamentals and the spot market, and all market participants need to guard against the risks involved.

On May 20, the Minister of Industry and Information Technology, Miao Wei, stated at a press conference that despite the year-on-year decline in mining investment in black metals, non-ferrous metals, and non-metallic minerals from January to April, this decline will not lead to a significant rise in the prices of raw materials such as iron ore.

On May 22, Li Lizhang, a representative of the National People's Congress and chairman of Sangang Mingguang, stated in an interview with China Securities Journal that scrap steel, as a necessary resource for steel production, is the only substitute for iron ore. For many years, the price of scrap steel abroad has been lower than that in China, and its quality is better. At the same time, the high price of imported iron ore is controlled by foreign capital. He suggested that while increasing domestic scrap steel recycling and application, the import of recycled steel should be encouraged to reduce pollutant emissions and suppress the price of imported iron ore.

On the same day, He Wenbo, secretary of the Party Committee of the China Iron and Steel Association, also stated in an interview with Modern Logistics that since the outbreak of the pandemic, steel prices have fallen sharply while iron ore prices have risen against the trend, indicating a divergence. In the future, multiple measures will be taken to promote the establishment of a more reasonable iron ore pricing mechanism and to address the issue of iron ore resource security.

Secondly, as the domestic pandemic eases, China's iron ore import volume is far higher than the same period last year, and the growth rate is also much higher than the growth rate of crude steel production in the same period. The supply-demand tension issue has basically eased, but the market continues to engage in malicious speculation. What is the intention?

According to data released by the General Administration of Customs, from January to April 2020, China's cumulative iron ore imports reached 36.3183 million tons, an increase of 2.1622 million tons or 6.33% year-on-year. Comparing the first four months from 2015 to 2020, this year's import volume has exceeded that of previous years, surpassing the second-highest import year of 2017 by 990.3 million tons. According to data from the National Bureau of Statistics, China's crude steel production from January to April 2020 was 31.94608 million tons, a year-on-year increase of 1.3%. According to data provided by Xiben New Line, from January to April 2020, domestic iron ore raw ore production totaled 26.0326 million tons, a decrease of only 486.6 million tons compared to the same period last year. Moreover, even in the face of many adverse factors such as the pandemic and weather, the actual shipment volumes from Australia and Brazil are both higher than the same period last year. According to data from Deutsche Bank and Brazilian customs, from January to April 2020, Australia and Brazil exported 278 million tons and 60.7 million tons to China, respectively, with year-on-year increases of 11% and 10%. Roughly calculated, China's iron ore port inventory should have slightly increased.

However, according to statistics from My Steel Network, on June 5, the iron ore inventory at 45 ports nationwide was 107.537 million tons, while the corresponding data on January 3, 2020, was 125.134 million tons, a decrease of nearly 18 million tons? At the same time, the data from Xiben New Line also roughly matches the above data. Both are authoritative media in the steel industry with consistent statistical standards and data. But where exactly is the problem? Is it that some institutions deliberately concealed data, or is part of the inventory transferred to other storage locations not included in the above statistics, or is there an error in the data from the General Administration of Customs and the National Bureau of Statistics? This is worth our in-depth study.

In addition, in fact, in 2015, the national iron ore port inventory was only over 80 million tons, and the iron ore price was only around 400 yuan? Now that the inventory has increased, the price has risen instead, which seems even more illogical according to the bullish logic. The continuous speculation by the main bullish capital regarding the reduction of inventory is worth exploring.

Thirdly, the market has recently repeatedly speculated that the worsening pandemic in Brazil has led to the closure of some mines under Vale, and some media have spread unverified news, maliciously misleading investors and colluding with the main bullish capital to drive up prices.

On the evening of May 29, Wenhua Finance and My Steel Network published an unverified message: "Due to the impact of the COVID-19 pandemic, three major mines of Vale located in the Itabira region will be closed, and Vale will lower its annual iron ore production target by 20 million tons."

It is not difficult for observant individuals to find that this message serves as an explanation for the sharp rise in iron ore futures across the board on the Dalian Commodity Exchange on May 29. On the evening of May 29, Vale officially stated that all business activities in the Itabira mining area remain unchanged, and Vale's annual iron ore production guidance target remains unchanged, still at the guidance production of 310 million to 330 million tons announced in the Vale 2020 Q1 production and sales report.

On the morning of May 30, My Steel Network quickly issued a rebuttal, but by this time it was already a domestic holiday, outside of trading hours. Wenhua Finance and My Steel Network, as influential institutions in the market, knowingly published such news without verification, which could lead to significant fluctuations in the iron ore futures market, clearly violating the regulations in the futures trading management rules that state "no unit or individual may fabricate or disseminate false information regarding futures trading, nor may they collude maliciously, jointly buy and sell, or manipulate futures trading prices in other ways."

On May 29, the main iron ore contract for 2009 increased its position by 92,000 lots in a single day, with a daily increase of 6.44%. The inflow of funds into all iron ore contracts exceeded 2 billion yuan in a single day, among which the main bullish capital increased its position in the 2009 contract by nearly 40,000 lots at Yong'an Futures, Galaxy Futures, and Hongyuan Futures. With such a large market movement, the main capital must have been aware of the insider information in advance and made arrangements. Relevant media not only failed to release information in a timely manner but also published news that contradicted the facts afterward, seriously violating the objectivity and fairness expected of a media platform. The more complex reasons behind this deserve our deep exploration.

On the night of June 5, the main iron ore futures contract 2009 surged again at the end of the trading session, closing at 760.0 yuan/ton by 23:00, with a direct increase of nearly 10 points within a few minutes, which also drove a rebound in black commodities such as rebar and coke that were in a clear downward trend. Early on June 6, Wenhua Finance announced a piece of news: due to concerns about the pandemic, a Brazilian court ordered Vale to close a mine.

As of noon on June 7, Vale had not made an official response on its official website or in public media. Why did Wenhua Finance release unverified news again, using vague expressions from foreign media without citing sources, and stating that the content was unverified, thus assuming the risk of entering the market? Is it to disclaim responsibility or to shift blame, or is there an inherent issue?

Additionally, according to foreign media reports, other bulk commodities imported from Brazil, such as soybeans and white sugar, do not seem to have been affected by the pandemic. Domestic futures varieties like soybean and white sugar did not see significant price increases after the pandemic, and recently, the main contract price of white sugar on the Zhengzhou Commodity Exchange has been continuously declining. Why are the trends of these three varieties so different due to the pandemic? Moreover, most of Vale's iron ore is from open-pit mines, which are basically mechanized, so the impact of the pandemic should be less than that on soybean and white sugar. Some unscrupulous media are maliciously hyping up news using the pandemic, which raises suspicions about their ulterior motives.

Currently, the mainstream Platts price index and Fastmarkets MB have reported that the price of 62% iron ore at Qingdao Port is completely tracking the prices of the Dalian Commodity Exchange, and the Platts index can no longer objectively reflect the actual price of the iron ore market. Meanwhile, the Dalian Commodity Exchange's iron ore futures prices have become the market's barometer, which is completely inconsistent with international market logic.

According to the news release practices of Wenhua Finance, around half an hour before the night trading session opens each trading day, approximately at 20:30, they publish the price data for 62% iron ore at Qingdao Port provided by Fastmarkets MB. The price movements of the two are highly correlated, while the Platts index only publishes the day's price after the afternoon close. Of course, the direction and magnitude of price changes are also remarkably similar to the Dalian Commodity Exchange's iron ore futures. The Fastmarkets MB price benchmark and the Platts index, as pricing standards for imported iron ore futures and spot prices, are no longer used as anchors but rather rely on the Dalian Commodity Exchange's iron ore futures prices for pricing. Additionally, as the Dalian Commodity Exchange's iron ore futures have been internationalized and attracted international investors, it is inevitable that international investors may manipulate the Dalian Commodity Exchange's iron ore futures prices to influence the Platts index, thereby affecting the Fastmarkets MB price, leading to most of the domestic port iron ore spot transactions occurring after the afternoon session.

Thus, the price of imported iron ore, which was originally low-cost to mine and had controllable transportation costs, seems to be guided by the Dalian Commodity Exchange's iron ore futures prices. However, the facts show that this pricing power seems increasingly unfavorable to China. According to relevant data, in 2019, the average landed cost of the four major mines was around 50-60 USD/ton. In terms of iron ore freight rates, in 2019, the cost from Brazil to Qingdao was 18.96 USD/ton, and from Western Australia to Qingdao was 8.52 USD/ton. Considering the significant drop in crude oil prices this year, although the RMB has depreciated, freight rates should have decreased this year. It is expected that the cost of balancing iron ore supply and demand in 2020 will be between 55-60 USD/ton.

According to data released by Fastmarkets MB, on June 5, the price of 62% iron ore shipped to Qingdao Port was reported at 100.74 USD/ton, while the Platts index was quoted at 100.95 USD/ton. Without considering tariffs, this translates to nearly 800 yuan/ton, significantly deviating from the value center and seriously contradicting basic economic principles. Excessive profits are ultimately unsustainable. At the same time, according to the current iron ore spot prices, most steel mills in China are producing steel with almost no profit, which forces steel mills to raise ex-factory prices, causing the entire industry chain and society to bear the cost. The so-called pricing power achieved through the country's supply-side structural reforms has been easily stolen, exacerbating risks in the upstream and downstream of the steel industry chain, and transmitting to the downstream of the industry chain, raising the overall inflation rate of social goods, which is indeed counterproductive.

Since May, major funds have been repeatedly laying out long positions in Yong'an, Shenwan Hongyuan, Yide, and Zheshang Futures, especially recently implementing irrational and bizarre position changes based on unverified news, which inevitably raises huge suspicions of market manipulation.

Taking the Yong'an Futures seat, the base of Jiangsu and Zhejiang speculators, as an example, since May 6, the Yong'an Futures seat has been continuously increasing long positions in the main iron ore contract i2009.

According to data analysis from Dongfang Caifu Net, as of the close on April 30 at 15:00, the Yong'an Futures seat held the following positions in i2009: long positions 58,493 lots, short positions 30,434 lots, net long positions 28,059 lots. Since May 6, the Yong'an Futures seat has been continuously increasing net long positions in i2009, with a peak on May 15, where long positions reached 111,883 lots, short positions 40,781 lots, and net long positions 71,102 lots. However, starting from May 16, the Yong'an Futures seat began to slightly "reduce long and increase short."

As of the market close on June 4 at 15:00, the position holding data for Yong'an Futures has changed to: long positions of 29,902 lots, short positions of 49,705 lots, and a net short position of 19,803 lots, which has completely flipped from long to short. The corresponding settlement prices for iron ore are: April 30 at 607.0 points, May 15 at 656.0 points, and May 23 at 723.0 points. Since the data system does not provide the cost of building positions for Yong'an Futures, we cannot know the specific precise data. However, based on big data analysis of positions, we can make preliminary estimates. Yong'an Futures began to flip from short to long on April 8, gradually building long positions. The settlement price on April 8 was 578.5 points, and thereafter until April 30, there was a net increase in long positions. During this period, the settlement price for i2009 fluctuated between 580-620 points, allowing us to estimate that the average holding cost for Yong'an Futures is around 600 points. From April 30 to May 15, the net increase in long positions for Yong'an Futures was 43,043 lots, with the settlement price for i2009 fluctuating between 605-655 points, averaging at 630 points. Weighted together, as of May 15, Yong'an Futures had a total net long position of 71,102 lots, with a holding cost of about 620 points. On May 19, 21, 22, 26, June 1, 3, and 4, Yong'an Futures significantly reduced net long positions by as much as 105,000 lots (after deducting the additional long position of 11,000 lots on May 29, the net long position reduction also reached 94,000 lots). The settlement prices for these six days were 698.0 points, 711.0 points, 723.0 points, 706.5 points, 756.5 points, 753.0 points, and 753.0 points, with an average price of about 730 points. It is expected that this round of position reduction will yield a profit of up to 940 million yuan (100 points/lot * 94,000 lots * 100 yuan/point). Although Yong'an Futures is known as a barometer for iron ore futures prices, the unexpected significant increase in positions by 33,000 lots on May 29 and June 5 is indeed a "stroke of genius." These two days coincided with key news about the closure of Vale's mines in Brazil due to the pandemic. One cannot help but wonder, from a trend perspective, that during this time, Yong'an Futures took profits by reducing positions at high levels, which is understandable. However, the unusual increase in positions on two days amidst continuous reductions raises questions. Is it that the main funds are so coincidentally prescient and insightful, moving against the trend and getting ahead, or are there ulterior motives behind the spread of rumors to fish in troubled waters and seek huge profits? This is truly chilling. Why is it that other trading positions do not have such bizarre position change data?

At the same time, as the largest long position holder, Yong'an Futures has been reducing positions while prices steadily rise. Especially on May 29 and June 5, it inevitably raises suspicions that someone is using unverified information to manipulate the market, with both sides of the main players coordinating to shift positions while simultaneously driving up prices, raising concerns about profit transfer. Various reasons can probably only be convincingly explained by the parties involved or through the public disclosure of relevant trading data by the Dalian Commodity Exchange. On June 28, 2019, the Supreme Court and the Supreme Procuratorate issued judicial interpretations regarding the handling of criminal cases involving market manipulation and trading based on undisclosed information, clarifying the circumstances of "manipulating the securities and futures market by other means," the scope of "other undisclosed information outside of insider information," the calculation of "illegal gains," and the standards for determination. In the nearly half a year since 2020, Yong'an Futures has already made over 1 billion yuan in profits from iron ore futures.

According to the judicial interpretations from the "Two Highs," Yong'an Futures is suspected of "manipulating using information advantages" and "cross-period and spot market manipulation," which can be recognized as "other methods of manipulating the securities and futures market" as defined by criminal law. It is hoped that the Price Department of the National Development and Reform Commission, the Inspection Bureau of the China Securities Regulatory Commission, the Futures Department, and the Dalian Commodity Exchange will actively crack down on price violations and price monopoly behaviors by iron ore suppliers, and vigorously investigate and combat malicious speculation on iron ore prices. Institutions that manipulate iron ore prices for huge profits using information and capital advantages should be dealt with severely, and those involved in criminal activities should have their illegal gains confiscated according to the latest judicial interpretations from the "Two Highs" and be held criminally liable.

Sixth, from the perspective of national and domestic steel mill interests, the sharp rise in iron ore prices has led to huge foreign exchange losses for the country and severely eroded the production profits of steel mills, resulting in the loss of the achievements of supply-side reform.

As the most core material for steel production, iron ore is naturally a very important industrial raw material. Since 2000, China has become the world's largest producer, consumer, and exporter of steel. According to data from the National Bureau of Statistics, in 2019, the output of crude steel, pig iron, and steel products from large-scale industrial enterprises nationwide was 996 million tons, 809 million tons, and 1.205 billion tons, respectively, representing year-on-year increases of 8.3%, 5.3%, and 9.8%. According to preliminary statistics from the World Steel Association, global crude steel production reached 1.870 billion tons in 2019, a year-on-year increase of 3.4%. According to data from the General Administration of Customs, in 2019, China imported a total of 1.07 billion tons of iron ore, an increase of 0.5% year-on-year, with an import value of 101.46 billion US dollars, an increase of 26.64 billion US dollars year-on-year, a growth rate of 33.6%, and an average price of 94.8 US dollars/ton, an increase of 34.3% year-on-year.

In contrast, according to data released by the Ministry of Industry and Information Technology, in 2019, member steel enterprises of the China Iron and Steel Association achieved sales revenue of 4.27 trillion yuan, a year-on-year increase of 10.1%; profits reached 188.994 billion yuan, a year-on-year decrease of 30.9%. According to published financial reports, the world's largest mining company, BHP, reported a basic EBITDA of 12.1 billion US dollars, while Australia's other two major mining companies, Rio Tinto Group, reported a basic profit of 10.4 billion US dollars for the same period in 2019, and FMG Group reported a net profit of 3.2 billion US dollars for the 2019 fiscal year. The combined profits of the three companies reached as high as 26.5 billion US dollars, which, at the current exchange rate of 7.00, is approximately 185.5 billion yuan. This means that the profits of the three major Australian mines in 2019 were equivalent to the total profits of all Chinese steel companies in 2019. At the same time, the foreign exchange spent on iron ore imports by China in 2019 was equivalent to the profits of its own steel mills. This is a terrifying figure; in other words, almost all steel mills in China are working for the three major Australian mines.

As we all know, since the "Two Highs and One Surplus" industry was initiated at the end of the Central Economic Work Conference in 2015, focusing on "capacity reduction and inventory reduction" as the core of supply-side structural reform, the vast majority of steel mills across the country have successfully turned losses into profits, with some steel mills achieving their best results in history in 2018. However, since entering 2019, the sharp rise in iron ore prices has consumed industry profits. On one hand, the soaring iron ore prices have increased steel production costs, leading to higher steel prices, which in turn increases costs for downstream enterprises and creates operational difficulties, resulting in a significant shrinkage of steel mill profits, with profits falling into the hands of overseas mines. Recently, the iron ore market has been completely driven by soaring futures prices, leading to a significant increase in spot prices, which has deviated from the original hedging function of the futures market. Various rumors have begun to greatly influence market sentiment, becoming one of the main means of control by major funds. Iron ore futures have turned into tools for spot traders and speculative funds to exploit and seek huge profits, and the continuous rise in iron ore prices over the years has come at the cost of the already thin profit margins of steel mills and even the loss of national foreign exchange reserves.

The achievements of supply-side reform are hard-won, and the balance of supply and demand in the steel industry chain needs to be maintained. National interests are paramount, but all of this requires our joint efforts to maintain, rather than merely staying at the level of slogans and words. It should be reflected in actions, and maintaining the interests of enterprises and the country is urgent.

Seventh, iron ore resources, alongside crude oil and integrated circuit chips, are one of the three major imported commodities, and the resources of iron elements are crucial to the country's macro strategy. Establishing a diversified iron element supply system and strategic resource reserves is already on the agenda.

As we all know, Australia and Brazil have always been "friendly countries" of the United States. In the recent context of escalating trade and political issues between China and the U.S., if the U.S. uses its ally relationships to incite these two countries to make things difficult for China regarding iron ore imports, wouldn't that put our country in a dilemma? Recently, there have been continuous trade frictions between China and Australia, and the Australian Trade Minister once threatened to cut off iron ore exports to China. Although this was just a statement that is not absolutely official, it is enough to sound the alarm for us. Establishing a diversified strategic reserve resource library based on overseas iron ore, scrap steel, and domestic iron ore is urgent.

During the 2020 Two Sessions, Tan Chengxu, a representative of the National People's Congress and chairman of Ansteel Group, stated, "We must accelerate the formulation of a safety strategy for our country's iron ore resources, vigorously support the development of domestic iron ore, and enhance the security of domestic iron ore resources by reducing the value-added tax rate, expanding the scope of deductions, and establishing a 'National Iron Ore Development Support Fund' to strengthen policy support." Cao Zhiqiang, secretary of the party committee and chairman of Hualing Group, said, "In the context of rising anti-globalization trends, enterprises must still firmly implement the strategy of going global, carry out international business layout, and invest in resource development overseas through direct investment, mergers and acquisitions, and shareholding to increase the proportion of self-owned resources overseas and maintain the safe and stable operation of the industrial chain."

At the same time, Cao Zhiqiang, chairman of Hualing Group, Yuan Weixia, secretary of the party committee of Sansteel Group, and other leaders strongly advocate using scrap steel to constrain high-priced ore. It is time for relevant national departments to resolve the above issues by lifting restrictions on scrap steel imports, increasing domestic mining exploration and extraction efforts, subsidizing domestic iron ore mining enterprises, expanding import channels from overseas countries such as Russia, Saudi Arabia, India, and Ukraine, and actively participating in international mining resource equity investments.

Finally, whether as an ordinary futures investor or a scholar with some research on China's macro economy, I believe that there is essentially no shortage of foreign iron ore supply. Even during the dam collapse incident at Vale in Brazil in early 2019, there was no shortage throughout the year.

It is not clear whether the iron ore market is buyer-dominated or seller-dominated; rather, it is a mutually dependent relationship. The reason why the four major overseas mines can firmly control domestic iron ore prices is that, on the one hand, our domestic steel industry is indeed still in a period of production and capacity growth, with strong demand. On the other hand, it is due to the high concentration of overseas mines, where a few mines control the shipment volume of iron ore to China and regulate the port inventory levels. Thirdly, there are "mining agents" and "agent funds" in the domestic market. As iron ore is an important raw material for China's steel manufacturing industry, can we also establish a national iron ore futures fund to lower iron ore futures prices, suppress "agent funds," while also lowering delivery standards to avoid long positions being forced to close, and reasonably guide the direction of domestic information release to safeguard national fundamental interests?

Finally, recently, multiple sources in the market have reported that major funds are collaborating with Yong'an Futures, Hangzhou Relian Group, and a certain steel plant in Hebei to jointly squeeze out the short positions of wealthy clients in Donghai Futures and Luzheng Futures. The fire in the city gate affects the fish in the moat; the fierce struggle of major funds also profoundly affects and changes the fate of many retail investors. I once again urge the Dalian Commodity Exchange to investigate and analyze the positions and trading data of the aforementioned investment institutions and seats in light of the recent "Notice on Adjusting the Disclosure Content of Position Information" to respond to the serious concerns of investors.

Source: Fengyan Economic Observation

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