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Iron Ore Investors Mine Irrational Exuberance

The price of iron ore has surged by almost 40% since August 2023, despite the crisis in China's property sector.

by Victor Adetimilehin

The price of iron ore, a key ingredient for steelmaking, has surged by almost 40% since August 2023, despite the ongoing crisis in China’s property and construction sectors. What is driving this rally and how long can it last?


China’s Demand and Supply Constraints

The main factor behind the iron ore boom is China, the world’s largest consumer and importer of the mineral. China accounts for about 70% of global iron ore demand and produces more than half of the world’s steel. 

However, China’s economy has been slowing down amid a crackdown on debt, environmental regulations, and the fallout from the Evergrande crisis, which has triggered fears of a collapse in the property market. The property sector alone consumes about 40% of China’s steel output, according to Reuters.

Despite these headwinds, China’s steel production has remained resilient, thanks to strong demand from other sectors, such as infrastructure, machinery, and automobiles. China’s steel exports have also increased, as the country has taken advantage of the global recovery from the COVID-19 pandemic and the higher prices of steel products in overseas markets.


At the same time, China’s iron ore supply has been constrained by several factors, including:

– The ban on Australian iron ore imports, which was imposed in 2020 amid a diplomatic row between the two countries. Australia used to be China’s largest source of iron ore, accounting for about 60% of its imports in 2019.

– The disruptions in Brazil, the second-largest iron ore exporter to China, due to the pandemic, environmental issues, and operational problems at some mines.

– The lower quality and higher cost of domestic iron ore production in China, which cannot meet the demand for high-grade ore that is needed for more efficient and less polluting steelmaking.

These factors have created a supply-demand imbalance in the iron ore market, pushing up the prices to levels that are not justified by the fundamentals, according to some analysts.


A Bubble Waiting to Burst?

Some experts believe that the iron ore rally is unsustainable and will soon reverse, as the supply and demand dynamics change.

On the supply side, there are signs of improvement in both Australia and Brazil, as well as in other iron ore producing countries, such as South Africa, Canada, and India. These countries are ramping up their production and exports, aiming to capture a larger share of the lucrative Chinese market.

On the demand side, there are expectations that China’s steel consumption will decline, as the government tightens its monetary and fiscal policies, imposes more environmental restrictions, and curbs its infrastructure spending. Moreover, China is trying to diversify its sources of iron ore and reduce its reliance on imports, by investing in overseas mining projects, developing alternative materials, and increasing its scrap recycling.

These factors could lead to a surplus of iron ore in the global market, putting downward pressure on the prices. Some analysts forecast that the iron ore price will drop to below $100 per tonne by the end of 2024, from the current level of around $140 per tonne.


A Long-Term Outlook

However, not everyone is bearish on the iron ore outlook. Some observers argue that the demand for iron ore will remain strong in the long term, as the world transitions to a low-carbon economy and invests in green technologies, such as electric vehicles, wind turbines, and hydrogen plants. These technologies require a lot of steel, and hence, iron ore.

Furthermore, some contend that the supply of iron ore will not be able to keep up with the demand, as the existing mines are depleting and the new projects are facing delays, cost overruns, and environmental challenges. They also point out that the quality of iron ore is declining, as the high-grade deposits are becoming scarcer and more expensive to extract.

Therefore, they believe that the iron ore price will remain elevated in the medium to long term, albeit with some volatility and fluctuations.

Source: Reuters 

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