The Reasons Behind the Spectacular Rise in Iron Ore Prices

·4-min read

When the covid-19 pandemic first hit, appetite for raw materials nosedived. As demand fell, so did commodity prices. At first, the cost of metals, such as copper and zinc, plummeted. The value of agricultural raw materials, like cotton and rubber, also fell sharply. And in a world first, oil recorded negative prices.

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But for other commodities, 2020 marked the beginning of a spectacular ascent, with prices rising to levels not seen for years. As the best-performing major commodity of 2020, iron ore prices became red hot, hitting a record high of US$229.50 a tonne in May 2021.

In recent months, the price of iron ore has wobbled as China’s State Council vowed to strengthen its management of commodity supply and demand. But despite setbacks, the value of iron ore has continued to climb, increasing by 103.25% in the last year. The reasons for this dramatic rise are several.

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As an essential steelmaking ingredient, iron ore continues to play a crucial role in the construction of skyscrapers, bridges, and motorways. It also serves as a critical component in manufacturing goods such as cars, fridges, and mobile telephones. With the roll-out of vaccines across the world’s largest economies stimulating growth, demand for stell from infrastructure projects and manufacturing has begun to recover. In turn, this increased demand has led iron ore prices to soar.

The surge in iron ore prices has been particularly underpinned by increased demand in China – by far the largest importer and consumer of iron ore globally. Indeed, China requires more than 1 billion tonnes of steel each year to feed its long-standing infrastructure and building boom. Returning to pre-pandemic growth rates at the end of 2020, China’s appetite for iron ore skyrocketed, with data released in May showing imports grew 43% in April year on year.

It is not only China that is witnessing increased demand for iron ore. In fact, as European, North American and Far Eastern economies begin to get back on track, demand for raw materials such as iron ore has increased worldwide.

‘It’s more than just China now… it’s the whole strength of recovery in the steel industry globally,’ said Justin Smirk, senior economist at Westpac.

Supply constraints are also adding to the commodity’s gains. In the past year, iron ore mines have endured significant disruption, leading to supply-chain bottlenecks worldwide. With outbreaks of covid-19 prompting the closure of mines across South America, supply struggled to keep up with increased demand. In turn, this also served to drive an increase in iron ore prices.

Surging iron ore markets are a boon for big mining companies that are on course to witness earnings that will surpass records set during the commodity boom of the early 2000s. For example, Rio Tinto, a diversified natural resources group, witnessed skyrocketing sales growth, with sales increasing by 22.5% year over year for the six-month period ending 31 December 2020.

Similarly, the largest iron ore pellet producer in North America, Cleveland-Cliffs, is expected to witness an increase in its earnings by 17.1% from US$4.09 per share to US$4.79 per share for the fiscal year ending 31 December 2021.

Ferrexpo, the world’s third-biggest exporter of iron ore pellets, also witnessed considerable growth following the spectacular rise in iron ore prices. Over the 12-month period ending 31 December 2020, Ferrexpo saw a 13% increase in revenue to US$1.7 billion and a 45% increase in net cash flows. At Ferrexpo, long term investment led by Kostyantin Zhevago has meant during the 2020 calendar year, its dividend to shareholders grew by 26% to US$195 million.

Considering the successes of leading iron ore producers, it is clear that for some commodities, 2020 did not spell disaster but marked the start of an extraordinary ascent. Driven by increased demand in China and supply disruptions in South America, iron ore prices grew to historic heights.

With President Biden revealing plans to spend $1.7 trillion on infrastructure projects that include building roads, bridges, airports, railways, and power grids, it is likely demand for iron ore will only continue to grow. For this reason, we may see iron ore prices reach even dizzier heights in the near future.

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