The rise and rise of iron ore

Iron ore prices are soaring. Values reached approximately US$160 per tonne by the middle of December. This level was last recorded in early 2013. Demand growth, particularly in China, is driving the increase in the cost of the raw material.

The dispute between the authorities in China and Australia is curtailing trade of various goods between the two countries. However, this is yet to affect shipments of iron ore due to the need for high quality material in China.

Supply constraints in Brazil have tightened the market. Moreover, steel mills are blaming speculative purchasing by Chinese iron ore buyers for the sharp rise in prices, this month.

The fear of a tax, potentially being levied on Australian iron ore shipments into China, is feeding inventory building. Suggestions exist that supply is being deliberately restricted to boost prices for the steelmaking raw material. This is a notion that the associated miners have rejected.

Prices to remain strong

Many industry analysts believe that the price of iron ore has moved too high, relative to the current supply/demand balance. Nevertheless, the cost of the key input ingredient is expected to remain strong, in the short term.

Adverse weather conditions in the first quarter, in Australia, typically restrict mine output and often create logistical disruptions across the country. Consequently, substantial decreases in iron ore values are unlikely to occur, in this period.

Many global steelmakers purchase their iron ore based on indexed-linked prices. This will result in further pressure on mills to recoup the increased input expenditure by lifting their steel selling figures, in the coming months.

World average hot rolled coil prices have already risen by approximately fifty percent since the bottom of the cycle, in July of this year. Further significant increases in transaction values are forecast in the first quarter of 2021. Escalating raw material and other associated costs are likely to fuel the upward movement in global steel prices.