China's contradicting policies have made iron ore one of the most volatile commodities on the market. Investors are no longer able to accurately predict the movements of its price with bulls and bears jousting over its trajectory.
Over the past month, the price of one of the hottest commodities has experienced wild swings. Within 30 days, prices rose to records, collapsed into a bear market before returning to a bull market.
Benchmark futures for the commodity in Singapore rose to a record $233.75 a ton May 12. Just two weeks later, the price fell to $170.50 a ton.
The movements have largely been influenced by fundamental factors, particularly by Chinese government policies that are expected to directly affect steel and ore production and demand.
"China wants to cut steel production but control prices and to reduce investment but maintain employment. As policy shifts to keep the desired balance between these goals, the outlook for steel will improve or worsen accordingly," analysts at Kallanish Commodities said.
After emerging from the pandemic, China has had to churn out enormous amounts of steel to meet the demand of the recent property and infrastructure boom. This resulted in iron ore prices surging to more than double their value last year.
In May, China's steel mills hit an all-time production high of 473 million tons year-to-date. This makes the industry on track to surpass last year's record of 1.05 billion tons.
The Chinese government then put on the brakes as the central bank dialed down its fiscal stimulus and monetary easing. The efforts to contain inflammatory pressures meant that spending on construction slowed down due to tighter credit.
Also affecting iron ore prices is China's attempt to comply with President Xi Jinping's call for the nation to become a carbon neutral economy. According to analysts, the initiative will likely involve the reduction of metal production, which contributes about 17% of China's total carbon emissions.
Analysts said iron ore prices are expected to eventually settle but likely at a historically higher rate. China is expected to lean more toward implementing supporting measures to meet the demand for iron ore through 2021.
