Movement of metals in volatile times: Part Two – Iron Ore

Though not a metal, but a mineral, iron ore is a crucial ingredient in industrial steel production. Having skyrocketed in the first-half of 2019, iron ore prices have fallen back to earth in recent months.

The three big factors driving the iron ore price:

1. Global supply disruptions

The primary driver of Iron Ore this year has been disruptions to global production, which has reduced the supply of the mineral into global commodity markets, and sent its price to as high as $US114 per tonne. The biggest of these came in late-January 2019, when a collapse of a major mine operated by mining giant Vale in Brazil prompted the temporary closure of several Vale mines in that country. The next big disruption came courtesy of several major storms that ripped through Australia’s key Pilbara area in March and April, which slowed mining activity in that region.

2. Changes in Chinese steel production

Although supply side issues have been the main driver of Iron Ore in 2019, there has been a demand-side factor supporting the rally, too. Chinese industrial demand for the mineral had ramped up through the back-end-of 2018, and the start-of 2019, as China’s policy makers increased steel production to stimulate the Chinese economy through the headwinds caused by the US-Chin trade-war. This dynamic has waned, however, in recent months, as reports flow through commodity markets that steel production in China has slowed down, and that iron ore stockpiles at Chinese ports have increased.

3. The global growth outlook

More broadly, and from a historical perspective, iron ore prices have been determined by the strength of the global economy. In times when economic growth is improving, demand for iron ore increases as countries seeks to boost their industrial output. As commodity markets enter the second half of 2019, the global economic outlook is apparently worsening, largely due to a trade-war induced slowdown in the Chinese economy. That factor is driving iron ore prices down from the its July highs, with the trend expected to continue for as long as economic activity is diminishing.

What might be in store for the price of iron ore?

Both the supply and demand stories in the market are indicating a period of weakness in iron ore prices in the near future. Crucially, Vale has recently announced that it would be slowly restarting its closed mines, and gradually normalising production. The impacts of storms in the Pilbara region have also subsided. The weaker global economic outlook seems to have become the driving factor in price – especially judging by the recent slow down in Chinese steel production, and the increase in Chinese iron ore stockpiles. Momentum has demonstrably turned to the downside looking at market technicals, indicating an iron ore price that could fall further from here.

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