Early last month Markets & Money looked at the factors that will be driving iron ore prices for the next 12 months.
This time we’ll be looking at a few additional things that may transpire as we head into the New Year.
A brief history of iron ore prices over the last year
To understand how iron ore prices work, it is necessary to understand three things about the commodity.
1) Academics have found that over the long run, Chinese GDP growth is the foremost factor driving iron ore prices.
As China is the world’s largest producer of steel, this makes sense as it feeds into Chinese construction and infrastructure projects.
2) Like other commodities, iron ore is sensitive to world events, especially war or the threat of war.
3) As China’s government tries to mitigate the impact of pollution, it occasionally intervenes in the steel industry, ordering reduced output to improve air quality.
All of these factors are inserted into the chart below, which tracks iron ore prices over the last year:
Now for a quick run through.
Late last year, we saw US/North Korea tensions spike, and at the same time China’s economy was booming with impressive GDP growth as you can see below:
Tension then began to ease between March and July, and iron ore prices started to fall off quickly.
Subsequently, we saw a global infrastructure boom, with a trough around the winter period as China reigned in steel production.
Next, there were signs of slowing Chinese GDP growth, followed by rumours and speculation that China would introduce a stimulus package between July and October.
Finally, on 31 October authorities in Hebei issued a second ‘orange alert’ due to dense fog and associated air pollution.
Hebei province includes China’s top steel making hub, Tangshan, which was forced to halve its steel output.
This led to a corresponding dip in iron ore prices.
Weather and slowing global/Chinese growth to impact iron ore prices for 2019
Have a look at the 10-year humidity data for Tangshan below:
As you can see, humidity peaks at the end of the month, which would be a factor in the air pollution/steel output balance that China is trying to strike.
Over the winter months China tends to curb steel output, which led to a previous trough just before the end of last year.
Extrapolating from this, it is reasonable to expect some curbed steel production over the next two months.
Indeed, as Reuters reports:
‘Ditching blanket production curbs imposed last winter, China has given cities and provinces the flexibility to set their own restrictions this year based on their emission levels.’
From this we can gather that production curbs will happen, but on a case-by-case basis.
Meanwhile, slowing global growth in conjunction with slowing Chinese growth could create some downward pressure in the coming six month window.
Governments may respond by pumping money into more infrastructure projects, causing a subsequent spike.
Finally, a collapse could occur in the 6–12 month range as a global recession may be on the cards.
Have a look at Bloomberg’s ‘neural network’ algorithm’s predictions as to when a US recession could occur:
As a result, for the next six months there is a band in which iron ore could trade, with plenty of volatility ahead:
Of course, major world events could cause drastic swings in the price, but this band is based on a mixed mid-term outlook for the commodity.
For Markets & Money