The S&P/ASX 200 Index (Index:^AXJO) is expected to open strongly this morning but our best loved miners may not join the party after the iron ore price tumbled.
The price of the steel making ingredient on the Singapore Exchange crashed 6.9% to US$162.83 a tonne last night. It hit a record high of $176.20 a tonne only the day before.
This will put the Rio Tinto Limited (ASX: RIO) share price, BHP Group Ltd (ASX: BHP) share price and Fortescue Metals Group Limited (ASX: FMG) share price under a cloud.
Regulatory screws tightening on iron ore futures
The dramatic turnaround is blamed on Chinese market regulators. China is trying to control the speculative fervour gripping the iron ore market and is stepping up efforts to limit trading positions, reported Reuters.
The iron ore price on China's Dalian exchange fell 4.8% to 1,055 yuan a tonne (US$161.23) on the news.
The Dalian Commodity Exchange moved to curb non-futures company members' single-day position openings for iron ore futures to 2,000 lots from Tuesday's session, according to Reuters.
The exchange operator is also proposing to reduce the limits on some iron ore trading accounts by more than half to better control risks.
Is iron ore driven by hot air or fundamentals?
Many experts believe the recent spike in the iron ore price is driven by speculators and not market fundamentals. China's economy is outperforming the world as the country has about fully recovered from the COVID‐19 pandemic.
The Chinese government is using steel-intensive infrastructure construction projects to stimulate its domestic economy.
Dwindling supply helps ASX iron ore miners
Meanwhile, iron ore supply is under pressure as Brazilian mining giant Vale SA downgraded its production guidance for 2021 and 2022.
The approaching wet weather in Brazil and Australia could further hamper supply at a time when demand is picking up.
Steel makers have been calling for a regulatory probe into the iron ore price as their raw material costs have risen dramatically.
They will be happy with the new curbs, although it remains to be seen if the regulatory reigns can tame the commodity price for long.
Foolish takeaway
What's interesting is that steel producers still seem to be making very good profits. This appears especially so for hot rolled coil (HRC). HRC is the predominant finished steel product and is the basis for many steel-based industrial products.
Citigroup commented in a note issued on Monday that HRC margins for steel mills are also high. This implies "a level of cost push that was not expected just a quarter ago".
If iron ore prices were to fall dramatically, it will be interesting to see if other Chinese industries demand that steel mill operators cut prices as well.
