Iron ore prices were on a tear last month as they pushed above the US$120 mark. However prices have since dropped by over 30%.
Analysts from Liberum are now expecting prices to keep dropping to US$75 a tonne by the end of this year and US$50 a tonne next year, as The Australian Financial Review reports.
Is the iron ore boom over?
One of the factors contributing to the slowdown is waning demand from China as the US–China trade war intensifies and the global economy slows.
China is by far the largest importer of iron ore, with a 65% share of all of the world’s imports.
While a US–China trade deal has been looking more promising in recent days, earlier this month the US announced new tariffs on China. The yuan weakened below the US$7 for the first time since the financial crisis, and China has stopped purchases of US agricultural goods. A devaluation of the yuan makes iron ore imports more expensive.
Since then, the US has also labelled China a currency manipulator.
Here is what BHP Group Ltd [ASX: BHP] wrote about it in a report this week:
‘Any further escalation in trade protection or loss of business confidence is a downside risk for consensus views of the world economy, commodity demand and energy and metals prices in the 2020 financial year. We actively consider the plausibility of this outcome in our range analysis.
‘[…]Over the longer term, we expect China’s economic growth rate to decelerate as the working age population falls and the capital stock matures. The US performed strongly in the 2018 calendar year but near-term prospects are less certain. The expansionary impact of tax cuts is expected to progressively fade and trade policies remain unpredictable.’
It’s not only a slow demand problem…
Iron ore prices spiked earlier this year because of a shortage in production that affected supply.
A dam bursting in Brazil in January caused the closure of several mines. Australia also saw an impact in iron ore operations after cyclone Veronica hit earlier this year. Australia is the largest iron ore exporting country in the world, followed by Brazil.
Higher prices have enticed more iron ore producers to get into the market. This increase in supply could also very well push down prices.
What happens next?
The worry here is that we are seeing both supply and demand affected by several factors including the US–China tensions, the decrease in global economic growth and an increase in supply.
It may mean that this is as good as it gets for iron ore prices.
Iron ore prices may have peaked already, but gold could be at the beginning of a bull market. Here are three reasons why you should be investing in gold right now.