Nev Power, CEO at Fortescue Metals Group, wants to quash the wild swings in iron ore prices.
Speaking at the Diggers & Dealers mining forum in Kalgoorlie, Western Australia, Power said the extreme swings in iron ore prices were being amplified by speculative futures trading, suggesting that it was often being driven by individuals and companies with no direct interest in ever actually taking physical delivery of iron ore, according to The Australian.
Power also cited ballooning Chinese iron ore port inventories as another factor that has amplified speculative activity in futures markets.
“We have seen recently port stocks climb quite significantly and that has created enormous volatility,” Power told the forum.
Since annual benchmark pricing was abandoned by the industry in 2010, trading of iron ore futures has increased rapidly, especially on the Dalian Commodities Exchange in China, leading to wild intraday swings that have quickly become the norm rather than the exception.
Many believe this volatility has been driven by an influx of speculators, often inexperienced, given a lack of alternate investments elsewhere in the country.
Over the past six months, the January 2018 iron ore future on the Dalian Commodities Exchange has had an average daily trading range of 3.9%, underlining just how volatile trading has been on an intraday basis.
That’s also contributed to massive longer-lasting moves in both spot and futures markets.
According to data from Metal Bulletin, the benchmark spot price for 62% fines slumped 44% between late February to mid-June before rebounding by over 41% over the past two months.
Given the increasingly wild movements, Power said that Fortescue was currently is in talks with steel mills and industry groups over a new potential pricing mechanisms that would curb volatility levels.
“It’s been raised with us from a number of steel mills and industry associations across Asia and I think there’s a growing level of interest in providing less volatility,” Mr Power said.
“I don’t think anyone is looking for the industry to go back to fixed price mechanisms or anything like that because those are too difficult to settle, but at the other end of the spectrum where we’ve got highly speculative trading and volatility makes it very difficult particularly for steel mills to forecast what their raw material costs will be.”
Power said recent discussions between Australia’s third-largest iron ore miner and Chinese steel mills revolved around potential mechanisms such as the increased use of contracts or structures that limit the range by which prices can rise or fall, something that he said would bring increased certainty to the industry.
He also offered some advice on how volatility levels in Chinese futures markets could be curbed in the interim.
“A good way to slow those things down is to increase transaction costs.”
“I’m not sure we need another exchange, but it’s perhaps about looking at the level of transactions on those exchanges, the frequency of trades and transaction costs,” he said.
In mid-March this year, the Dalian Commodities Exchange announced that it would temporarily slash transaction fees for near-month iron ore contracts, aimed to boost liquidity and encourage more industrial players to participate in the market.
That led to a surge in trading activity in iron ore futures, something that likely exacerbated the decline in both spot and futures markets over the proceeding months.
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