- Iron ore prices have been on a trajectory of growth since the successful trials of COVID-19 vaccines in 2020.
- The prices reached an all-time high during mid-May 2021 amid robust Chinese demand and supply disruptions.
- The recent volatility in iron ore prices is steered by factors like the Fed’s monetary policy and uncertainty in Chinese purchases.
Iron ore prices have been on a dramatic journey starting the second half of the last year. The prices reached a record high of US$237.57 per tonne on 12 May 2021. This rally could be attributed to a robust demand in Chinese steelmaking industries post China’s Labour Day holiday.
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What is making the iron ore volatile?
The most recent undulations in the iron ore price pattern are driven by the combined impact of the Federal Reserve's monetary policy and uncertainty in the Chinese purchase.
Fed officials are focused on addressing market concerns that inflation pressure would force central banks to tighten the monetary policy. However, the Fed is not looking to tighten monetary policy even though some of the Fed officials are ready to consider tapering of bond purchases amid a robust economic recovery.
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The other significant factor behind the recent rally in the commodity is a strong demand in the steel industry across the globe.
Global steel output increased by nearly 7.5% during the last 12 months with a substantial 24% surge in the current year. China is the biggest importer of iron ore, the raw material used to manufacture steel. The robust demand from Chinese steelmaking industries and supply disruptions from the leading exporters of the world have disturbed the market equilibrium and pushed iron ore prices to record highs.
The skyrocketing prices of iron ore and other commodities have squeezed the margins of domestic consumers in China. As a result of this, during the last week, China's cabinet decided to curb exorbitant commodity prices.
Most of the commodities experienced a decline in their prices this week as the Asian country decided to strengthen its commodity supply and demand management. The prices plummeted due to a strong sell-off.
The Chinese officials have drafted a five-year plan to reduce the country’s dependency on iron ore imports. They are also planning new investments in the domestic mining sector and seek new imports from Mongolia, Russia, Myanmar, and Kazakhstan, thus ditching Australia, the biggest exporter of iron ore to the Chinese market.
Iron Ore Miners
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With the ongoing iron ore price rally, leading iron ore miners, including Rio Tinto (ASX:RIO), Fortescue Metals Group (ASX:FMG), BHP Group (ASX:BHP) and Brazil’s Vale SA reported strong earnings for the March quarter.
With so many variable factors, the volatility in commodity prices, especially in iron ore, is anticipated to continue in the near future. Watchdogs are expected to keep a close watch on very minute economic number and the Fed’s comment to gauge the next move. Any comment from China on commodity prices may also ignite another sell-off.