The Strategist

Global iron ore prices hit seven-year high

12/15/2020 - 03:07

An unprecedented rise in global iron ore prices was caused by China's construction boom amid strained relations with Australia, which is the country's biggest iron ore supplier, as well as by a reduction in projected supply from Brazil. Chinese steelmakers are asking regulators to investigate for possible speculation.

Peter Craven
Peter Craven
Iron ore prices have reached a seven-year high and continue to rise. The main driver for this is the demand from China, the world's main iron ore importer, where ore prices have increased by 65% over the year. According to Bloomberg, futures in Singapore have risen 70% over the year, to the highest level since trading began in 2013. CNBC notes that futures on the Dalian Commodity Exchange jumped by 10% last Friday alone, crossing the 1,000 yuan ($152.9) per tonne mark for the first time ever. Spot prices have risen by $18 a tonne since November 30.

China increased its share of global steel production from 54% in 2019 to 58% in January-October. Meanwhile, ore imports from Australia and Brazil have been kept low in recent months. Expectations of further disruptions in raw material supply are pushing prices up. 

China is the main customer of the world's leading iron ore exporter, Australia. However, after Australia called for a full investigation into the circumstances and causes of the coronavirus pandemic, relations between the countries escalated, translating into widespread trade restrictions. In October, for example, China effectively stopped receiving Australian coal: ships with cargo worth more than $500 million were stranded at Chinese ports. The country has also restricted or stopped imports of a range of other goods. Fears that trade restrictions will extend to iron ore are forcing Chinese buyers to build up inventories.

Brazil, the second largest exporter of ore to China, may also face problems. Brazil's Vale has lowered its production forecasts for the next two years. In 2020, the company expected to produce more than 310 million tons, now the forecast is 300-305 million tons. In 2021, instead of at least 318 million tons, the company gave a more cautious forecast of 315-335 million tons.

China's major steelmakers have already asked the State Administration of Market Regulation and the Securities Commission to investigate pricing in the iron ore market. 

"The current rise in iron ore prices has deviated markedly from supply and demand fundamentals, noticeably exceeding any expectations of steel mills, and contains clear signs of major speculation," said the Chinese authority.