Iron Ore Tumbles to a ‘Reasonable’ Price

What affects the price of iron ore more than anything?

It’s actually a really obvious answer. Supply and demand usually determines why something — anything —costs more or less. And it’s no different for iron ore. The more iron ore extracted…the further down prices go. If there is an abundance of something, it usually makes that thing less valuable.

If we couple oversupply with lacking demand, then prices will, of course, plummet. And for most commodities this has happen already, including iron ore.

China is a major consumer of iron ore. They use the mineral to create steel which fuels their infrastructure.

But the harrowing fact is that China’s demand for iron ore is dropping. And we know this because China’s trade balance figures, released yesterday, showed both exports and imports fell month-on-month. However, let’s focus on the drop in key imported commodities, iron ore included.

China imported 8.58 million fewer tonnes of iron ore in February than they did in January. The demand for iron ore was already slipping over time. However, an 11.65% was much more than anyone predicted.

China’s trade balance data pushed a lot of commodity prices back, where they might have continued to rally. The price of many major miners, like BHP Billiton [ASX:BHP] and Rio Tinto [ASX:RIO], were pushed back 4.6% and 4.1% respectively. Commodities, like copper, also decline. And, of course, iron ore has its fall from grace.

On 7 March iron ore surged 20%, to US$62.60 a tonne. It was a record in percentage terms, on top of being the biggest dollar move in four years. But, of course, this move could not be sustained.

The reminder of lacking demand plummeted iron ore’s price. Overnight, iron ore tumbled 8.8%, to US$58.02 a tonne. The reason for iron ore’s surge was based on Chinese hearsay.

China’s government talked up its commitment to sustaining growth. This spurred speculation that helped support the price of iron ore. Soon after, big investment banks like Goldman Sachs and Citi Group said the gains wouldn’t last.

Of course they were right. But is there a bright future for iron ore?

Iron Ore Price Volatile

Source Australian Financial Review

If China increases their level of spending on infrastructure in the future, iron ore could very well trend up again. Maybe even past US$65 a tonne. There is a good possibility China is looking to increase their demand for steel. Early last year, China’s state planning agency announced more than 1,000 individual infrastructure projects they’re planning on building.

The expenditure will total US$317 billion in total. And China is hopeful that private investment will chip in its share towards establishing a series of public private partnerships.

China is also planning to build multiple railways in the future. The two most recent talked about railway projects is a second rail line to Tibet, and a high-speed line to Iran.

Both of these projects are still just conversations at this stage. But it is exciting to think that iron ore is at historically low prices, and could soon double, if not triple, its current price.

Härje Ronngard,

Junior Analyst, Money Morning

PS: If you’ve been watching the markets closely then you’ll know investors love the mining sector. And when I say love, I mean they love to speculate, be it buying or selling mining stocks. Yet, recently, the number of sellers has far outweighed the number of buyers in the market.

Though it may not seem like it, this is a very good situation for investors. A lot of great mining stocks have declined just because there’s a boycott on resources — not because they aren’t great companies.

Money Morning’s resource specialist, Jason Stevenson, believes there are 10 great mining stocks in the market right now. In Jason’s report, ‘The Top 10 Australian Mining Stocks for 2016’, he’ll show you why it’s a great time to buy mining stocks now.

To get your free copy, click here.


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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