There are signs of concern in China about the sustained rally in iron ore prices, according to a Reuters report. The Dalian Commodity Exchange (DCE) fired a warning shot across the bows of investors in the main domestic exchange for iron ore, reminding clients to trade rationally amid market uncertainties.

The exchange also said in a statement that it would strengthen daily supervision and crack down on irregularities to maintain market order.

While such warnings have happened in the past, the DCE’s announcement was the first of its kind since China lifted its lockdowns aimed at halting the spread of the novel coronavirus and boosted efforts to restart its economy.

The DCE’s words did have some immediate impact, with the front-month iron ore contract slipping to 899.5 yuan ($127.62) a tonne, down a modest 0.7% from a day earlier.

The question for the iron ore market is whether China can successfully jawbone prices lower, or whether the rally can continue as long as the fundamentals appear supportive.

It’s more likely that while Beijing will be displeased by having to pay so much for imported iron ore, it will deem keeping the economy’s recovery on track a higher priority.

The next question is then whether the iron ore rally can be justified by supply and demand dynamics, or whether it’s looking stretched.

On the supply side, it does appear that China has been able to source ample volumes, notwithstanding concerns about the spread of the coronavirus in Brazil, the second-largest exporter behind Australia.

China’s imports were a record high 112.65 million tonnes in July, up 24% from a year earlier and taking the total for the first seven months to 659.9 million tonnes, up 11.8% from the corresponding period in 2019, according to official data.

Looking at the breakdown by supplier, Refinitiv vessel-tracking data showed that imports from Australia were 67.05 million tonnes in July, up from 66.31 million in June and the highest on record since Refinitiv started assessing cargoes.

Imports from Brazil also showed some recovery in July, reaching 19.88 million tonnes, up from 13.84 million in June. However, it’s worth noting that imports from Brazil are still below potential, having been above 20 million tonnes a month for four months from September to December last year.

Another factor is that Chinese buyers turned to less traditional suppliers in recent months, buying 1.66 million tonnes from Canada in July, 1.86 million from Ukraine and 1.56 million from India.

On the demand side, China’s steel industry is continuing to churn out product, even if profit margins have been falling in recent months. Steel output rose to 3.05 million tonnes a day in June, a record high on a daily basis and up 2.4% from May’s daily output.

For the first six months of the year, China produced 499 million tonnes of steel, up 1.4% from the same period in 2019. So far, the amount of steel being produced has yet to boost inventories to worrying levels, with rebar stocks SH-TOT- RBARINV at 7.83 million tonnes in the week to 7 August, according to consultancy SteelHome.

Iron ore stocks SH-TOT-IRONINV were 116.2 million tonnes in the week to 7 August, down slightly from the prior week’s 117 million, but below the 122.5 million for the corresponding week in 2019. What the inventories show is that there is still room for iron ore to build further, and even though steel margins have weakened, it’s believed they are still positive.

On the supply side, it’s possible that shipments from Brazil will continue to recover, but as long as China is importing iron ore at a rate above 100 million tonnes a month, it would be brave to turn bearish on the price.

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