Five reasons the iron ore price is so high
Iron ore and steel prices in China and Asia are red hot, which is fueled by various factors and is driving up share prices for resources companies large and small.
Dalian iron ore futures were up 10% on Monday, while prices of steel rebar, hot rolled coils gained 6%, and with spot iron at US$226 in Singapore.
Here are five reasons the iron ore price is so high:
US infrastructure stimulus
Precisely how much money US President Joe Biden is going to end up throwing into the US and by extension the global economy via his various stimulus packages remains uncertain. Already, though, the number is running well past US$6tn, and could go north of US$10tn. Of that money, a significant chunk is earmarked for spending on the US’s famously ailing national infrastructure, including roads and bridges. These projects will suck in far more iron ore than analysts would have been modelling for before the coronavirus struck, meaning that most suppliers and operators in the global market have to a degree been wrong-footed.
Chinese economic growth
China continues to produce more than 1bn tonnes of steel per year to feed into its long-standing infrastructure and building boom, and iron ore is the number one component in steel manufacture. The high output levels come even as significant swathes of China’s steel producing capacity have been forced to curb output in response to new pollution rules. So, although production remains high, consumers here too would have been expecting even more supply to be available, hence the price squeeze.
South American supply chain concerns
How much supply South America, and particularly Brazil, will actually be able to deliver onto the market has been a vexed question throughout the coronavirus crisis. During the height of the crisis last year, mines across South America endured significant disruption, either because the virus was running through the workforce, or because the workforce was staying away to stay safe. In Australia, by contrast, where the virus has been kept broadly under control, supply disruptions have been minimal. The resultant dynamic is that the flow of iron ore into China from Australia has largely been able to meet demand, but at a higher price. A spat between the Chinese and the Australian government in the midst of the crisis strained nerves, but seems to have calmed down again now. Nevertheless, concerns about supply chains remain, and buyers are hoovering up all the product that’s on offer rather than waiting to see if the price falls.
Weaker US dollar
It’s good for the mining companies that the dollar is weaker because that’s the currency that commodities are priced in. The natural balancing of an efficient market means that all else being equal, if the dollar falls, commodity prices rise. As we’ve seen, though, all else isn’t equal. The iron ore price is rising anyway, with the weaker dollar merely serving to exacerbate the effect.
Wider global recovery
It’s not only the US and China that are recovering. The rest of the world is beginning to pick itself up after a year and a half of disruptions, and to restart something like normal economic activity. India remains under the cosh, but the Far Eastern economies and some of the European ones are getting back on track. International steel makers like ArcelorMittal are expected to benefit, but so too will the companies that mine the iron ore.
Companies to watch
The biggest producers of iron ore are the well-known mining behemoths, BHP (LON:BHP), Rio Tinto (LON:RIO), and Anglo American (LON:AAL). VALE (NYSE:VALE), the Brazilian champion is the fourth major player in this market.