Iron Ore Price Stabilises As Steel Runs Away

One of the most volatile commodities this year has been iron ore.

In early February, we saw iron ore trade as high as US$94.91 a tonne. But soon after, the commodity reached a low of US$54.30 a tonne for the year.

Iron Ore Price Stabilises

Prices are now stabilising around US$54-55 a tonne. But they could easily run up from here.

Why? Because demand for steel is picking up.

Take a look at the graph below. The white line is the spot price of iron ore. And the yellow line is the average Chinese domestic price of hot rolled steel sheets.

iron ore price

Source: Bloomberg

As reported by Reuters:

Overall, the picture shows that China’s appetite for imported iron ore remains strong, meaning the price decline so far this year isn’t driven by weakening demand.

The spot price ended at $US56.53 a tonne on Thursday, down about 28 per cent from the start of the year and about 40 per cent from a peak of $US94.86 on February 21.

In contrast, benchmark Chinese steel futures, the Shanghai rebar contract, have gained 15.1 per cent since the end of last year to Wednesday’s close of 3060 yuan a tonne.

This divergence between Chinese steel and iron ore prices is a marked change from last year, when they rallied in tandem, with rebar gaining 96 per cent to spot iron ore’s 81 per cent.

What now for the iron ore price?

I don’t see iron ore going much lower from here. I’m not going to guess a floor in the market. But I don’t see Chinese demand for steel dropping significantly anytime soon.

Over the next 10 years, China is planning to move 250 million people into its rapidly growing mega cities. That means it will need to build more power plants, airports and apartment towers. All of which will likely require steel in some way.

So if you’re an avid resource investor, take a long-term perspective on your investments.

Iron ore and other commodities might be depressed now. But I doubt they will continue to stay this low for much longer.

Regards,

Härje Ronngard,

Junior Analyst, Markets & Money

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Harje Ronngard is a Junior Analyst at Markets and Money. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. It’s not good enough to be right on average when it comes to investing. The market is volatile and it only takes one bad day to ruin your portfolio. You don’t want to end up like the six foot man that drowned in the river that was five foot deep on average. It’s why Harje is constantly reminding investors of their downside risk here at Markets and Money. He does so by simply asking just two questions.  What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Markets and Money readers. Right now Harje is focused on managing research and investments over at the Legacy Portfolio. An investment publication designed to significantly grow investor’s wealth over time with deeply undervalued businesses. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home amongst Matt’s high yielding income plays.


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