Are you an investor in iron-ore commodities? If so, hopefully you gained some nice profits during the start of the year. 2016 saw a dramatic rally in iron-ore prices, and it peaked in April when it almost reached $70 per metric ton. That was a 60% increase from the rock bottom prices for iron in the end of 2015. But by the first week of June, the prices have dropped significantly by about 30%.
According to Steel Index, ore with 62% iron content have just traded for only $49.5 per metric ton. That’s a far cry from the peak prices in early 2013, when iron-ore reached prices of almost $160 per metric ton. Still, it’s an improvement from the end of 2015 when the price actually dipped below $40 per ton.
Explaining the Early Rise of Iron Prices
The increase in the price of iron can be attributed to China, which isn’t surprising. That country is the largest consumer of raw materials in the world, and the volume of its iron-ore imports can have a significant effect on world market prices.
In March, the price of iron really took off following an announcement from officials in Beijing. The Chinese government had announced that it would focus on growth for its economy this year. This caused a furor in the iron market, and industry insiders hoped the Chinese stimulus efforts would increase the demand for iron ore since it is used to make the steel needed for numerous industrial applications.
In addition, the Chinese government also proceeded to relax credit and pump some liquidity into their economy. This resulted in a surplus of cash for speculators, who then put the cash into raw materials such as copper and iron-ore. These move extended the duration of the iron price rallies, so that in April alone the price rose 23%.
China did increase its import levels significant. In May alone, the country imported 86.75 million tons of iron ore. This the 4th highest monthly figure on record and it’s the biggest volume this year. The May imports makes for a 22.4% rise from the year before.
For the first 5 months of 2016, iron ore shipments increased 9.1% to 412.15 million tons. If this current rate continues, China may import a billion tons for the year, and it would be the first time the 1 billion tons per year mark would be reached.
Slowing the Market
So what happens when the price of a commodity increases? Usually, producers try to take advantage by producing more to meet the increased demand. They take a handsome profit off the high prices.
Several iron ore producers then began activating mines which were previously closed, in order to boost their production. Others, such as BHP Billiton, announced that they were developing a new iron ore mine back in Australia, which is one of the main suppliers of iron ore to China. The other major suppliers include Brazil, South Africa, Ukraine, and Iran.
The problem was that the increase in the production of iron ore outpaced the demand for the metal. Analysts predicted that global trade in iron ore would only grow by 4 million tons so that the worldwide trade only reached 1.48 billion tons a year. That’s the lowest rate of growth in more than 10 years.
It was also revealed that iron ore stockpiles in China have reached its highest level in more than a year, which may indicate a lower demand for iron ore in the near future. The inventories in Chinese ports have now reached more than 100 million tons, and that’s considerably more than the 75 million tons or iron ore they had in their stockpiles at the same time in 2015.
Speculation can also help drive prices up, but Chinese officials have taken some steps to curtail the pace of speculators. Among the measures they put up included a directive requiring day traders to come up with 36 times more collateral than what’s required for traders who hold their shares overnight. This move has also been one of the reasons why the price of iron ore dropped by nearly 30% from the April peaks.
So What’s the Forecast for Iron?
For the most part, it’s bleak for iron prices. The combined supplies from the major suppliers, as well as the marginal producers have grown much larger than the demand from the Chinese market. China may also transition from buying more iron ore to consuming their iron ore stockpiles.
Two major banks have gone on record to predict that iron ore prices will drop even further. Citi predicts that the $49 per ton price will continue this year, and by 2017 it will average at about $42 per ton. The National Australian Bank is even more pessimistic, as it predicted that the price will fall to $40 per ton for next year.
There’s always a chance that the price of iron-ore may rally in the coming years. Just don’t hold your breath.