Why are iron ore prices at 7yr highs?
Iron ore prices in China jump to record highs on supply concerns
Iron ore futures on China’s Dalian Commodity Exchange rose nearly 10% on Friday to a record high, surpassing 1,000 yuan ($ 152.95) per ton for the first time in history.
The combination of dwindling iron ore supply, rising steel demand and potential short-term disruptions caused by storms that hit Western Australia has prompted commodity analysts to express concern.
Lower supply estimates from Vale, the world’s second-largest iron ore producer, have heightened these concerns as the Brazilian company recently cut its 2020 production forecast and cut its forecast for next year. Meanwhile, November shipments from Brazil to other parts of the world fell to a six-month low..
Eric Hedborg (Erik Hedborg), senior analyst at commodity company CRU, told CNBC on Friday that China’s strong economic performance and boost to infrastructure development have spiked demand, reduced already low inventories and tightened market conditions. In tandem, maritime supplies from the iron ore main capacities of Australia and Brazil also decreased.
Australia accounted for 58% of the world’s total maritime iron ore shipments in 2019, most of which is exported to China, according to the World Steel Association. Brazil accounted for 23%.
«Now a tropical storm is approaching the coast, from where all iron ore is sent, and two of the largest ports in Australia are already closed, and together they account for just over half of the world’s iron ore supply.», – added Hedborg.
Poor low-pressure weather conditions have already settled on the coast of Western Australia and residents are advised to prepare for strong winds and tides.
Hedborg suggested that strong demand in China is likely to continue, with stocks persistently low, causing widespread concern for Chinese steelmakers, while the decline in overseas supplies will also last for a while..
Iron ore is a raw material used to make steel, which itself is used in the construction of various infrastructure projects, including high-rise buildings and public transportation systems..
«We will see lower production in Brazil than people expected, so this will continue until 2021 and we see problems with restarting mines, for example in Brazil, and Vale will continue to operate at a lower level next year.», – he said.
While turbulent weather in Australia may be shorter-term, Hedborg stressed that the first quarter is usually more prone to weather disruptions from events such as tropical cyclones..
«Right now, this is a sign that we may be seeing a rather problematic cyclone season in Australia.», – he added.
A group of Chinese steelmakers on Friday called on the country’s market regulator and securities regulator to investigate the recent spike in iron ore prices, according to Reuters, saying they «deviated from the fundamentals of supply and demand».