Tianjin Alcoa International Trade Co., Ltd. , https://www.tjalcoa.com
For many years, every time China's steel prices have experienced major fluctuations, the price level has always seemed to align with supply and demand conditions. However, over time, certain phenomena—like the coexistence of "high stocks" and "high prices," "inventory drops" and "price drops," or "low profitability" and "high output"—have repeatedly appeared, creating what many call a "paradox." These contradictions have often left analysts confused, even questioning whether the market follows any real "law."
In recent days, iron ore prices have surged dramatically. This sudden rise has sparked numerous analyses, with some describing the market as "sudden," "bizarre," or even "hypothetical." But is this really necessary? If we shift our perspective and move beyond traditional analytical models, we might realize that this price surge isn't as surprising as it seems—and it doesn't necessarily break any market rules.
Let’s start by considering the well-known investment principle from Bob Farrell: “When all experts agree, the opposite will happen.†Looking back at past forecasts about iron ore, most were pessimistic, citing factors like weak global economic recovery, oversupply in China, increased mining investments, and expected future production releases. These are valid points—but they ignore another important factor: the "bar theory."
The bar theory illustrates how decisions are made based on expectations. Imagine 100 people deciding each weekend whether to go to a bar with a capacity of only 60. Each person bases their decision on previous attendance. If too many predict more than 60 people, fewer actually go. Conversely, if most expect fewer than 60, more show up, leading to overcrowding. The key is that no one can fully predict others’ behavior, making accurate predictions nearly impossible.
This mirrors the current iron ore market. Most analysts predicted falling prices, and many traders reduced inventory, expecting a market turnaround. But when positive signals emerged, the market quickly reversed, proving these predictions wrong. Farrell’s wisdom still holds: when everyone expects the same outcome, the opposite tends to happen.
This round of rising ore prices reminds us that relying solely on historical data or simple supply-demand logic isn’t enough. Markets are influenced by complex factors, including speculation, macroeconomic expectations, and even psychological elements. In China’s steel market, where many players are involved, non-terminal demands and speculative activities can amplify price movements far beyond what basic economics would suggest.
Another key point is the role of steel mill bosses. Many argue that the sharp price increase is due to excessive destocking by steel mills and traders. While this may be true, it's not the full story. Steel companies have faced years of low prices and high costs, leading to severe financial strain. Limited funds and tight liquidity have forced them to manage inventory carefully, not recklessly. They are not blind to risks—they are reacting to a difficult environment.
Moreover, the unique nature of iron ore as a resource commodity must be considered. Unlike general goods, iron ore is non-renewable, and its scarcity gives it special characteristics. Major suppliers like Vale, BHP Billiton, and Rio Tinto control a large portion of the global supply, allowing them to influence prices through strategic pricing. This monopoly power plays a significant role in today’s market dynamics.
Finally, we should reconsider the idea of "hype" and speculation. In a market economy, these are natural behaviors. Traders and investors constantly assess opportunities, and when conditions seem favorable, they act quickly. The recent surge in iron ore prices was not just driven by hype—it was also a response to shifting expectations and market conditions.
In conclusion, the recent rise in iron ore prices challenges traditional views of market behavior. It shows that markets are not always predictable, and that understanding them requires more than just looking at supply and demand. As we move forward, it's essential to rethink our approach and embrace the complexity of modern markets.