- Regulatory pressures in China are likely to hinder prices.
- Reduced expenditure by the United States may significantly reduce demand.
- A weakening dollar is likely to support strong demand.
Iron’s strong rally continued today, as the markets seemed to have been reluctant to respond to recent developments in China and the United States.
Chinese regulators to subdue prices
Regulatory concerns are turning out to be the greatest influencers of price movement in China’s steel and iron markets. On Wednesday, the commodities’ prices slipped, following news that Shanghai Futures Exchange was cracking down on the so-called abnormal transactions, with the Chinese Government determined to flex its muscles in price controls in the next five years as a way to keep inflation low and to prevent the economy from overheating.
The intervention by China is nothing new, considering that this is the 14th time the country is implementing a five-year plan. According to China’s economic planners, the government intends to focus on regulating prices of key commodities such as corn, copper, and iron ore.
China’s recent pronouncements on iron ore seem to have done little to reverse the gains made by iron. The commodity was on a backpedal in the last week of May following China’s stun move, but has made a strong return. Iron ore climbed back above $200 on Tuesday, 1st June and on Thursday, iron ore with 62% iron content to China was trading at $204.
China, the world’s largest consumer of iron and other key raw materials, has expressed its concerns over the rate of inflation in key factory inputs. This, it says, is an imminent threat to the growth of its industrial sector, whose post-pandemic recovery has been admirable.
Understandably, a spike in the prices of raw materials translates to higher production costs and reduced competitiveness of products in the global market. In addition, the global trade in iron and steel is relatively convoluted, with minimal transparency, leaving price movements to a lot of “unsafe hands” and speculators.
The iron market has not only taken a hit from the government’s maneuvers, but natural forces have also been at play. It’s the monsoon season in South China, while the north suffers from extreme heat. The two conditions have combined to significantly hamper construction in the country, with iron taking a hit.
A weakening dollar and reduced infrastructure expenditure in the U.S.
Away from happenings in China, the weakening U.S. dollar is likely to push back further forces against the demand for iron. The dollar index has lost 4% of its highest recorded value this quarter, and the world’s standard currency is down against the euro by a similar margin. In addition, the yuan has gained 3% against the USD. The dollar’s losses against other major currencies are likely to cushion iron prices against significant losses.
The upcoming U.S. budgetary expenditure is another significant factor that could have a great influence on price movements. So far, indications are that the United States may significantly reduce its demand for iron, following last Friday’s announcement by the White House. According to the announcement, the Biden administration intends to reduce its infrastructure budget by about $500 billion.
This will almost certainly result in reduced uptake of iron in the country. Further to the reduced expenditure proposed by the government, the Republicans have indicated their intentions to force additional cuts as a precondition to reaching a deal. This may result in further reductions in iron ore demand in the U.S. In the end, the commodity’s prices will take a hit.
Iron has had a stellar year, with prices propelled by a spike in demand. The Relative Strength Index (RSI) is at 48 and seems to be headed downwards. At the time of writing, iron ore was at $204. Coming from the recent tumult, the RSI is likely to support marginal gains.
The combined actions by China and the United States seem to have achieved a short-lived impact in the past week. However, this may change in the coming days. Iron ore will find support at $203.40 and while the second support will be at $203.40. The bulls are likely to be cautious in their approach, but they may push the price to the first resistance at $204.90 and beyond that, they could propel it to the second resistance level at $206.85