Why is iron ore rally hurting these two sectors?   

Summary

  • The prices of iron ore have almost doubled in the last one year, on account of strong economic growth, globally.
  • China's decision to curb steel production and rising iron ore prices have pushed steel prices to record highs.
  • Construction and automotive are the worst-hit sectors due to a surge in global steel prices.

Iron ore prices soared past US$200 on Tuesday, driven by reports that China's largest steelmaking province, Tangshan, is planning to ease requirements for production cuts at its mills in the second half of 2021.

The prices of the commodity have almost doubled in the last one year. In recent months, the market has seen several ups and downs with prices hitting a record high of US$237.57 per tonne during mid-May, owing to a strong demand from China after the Labour Day holiday.  

Source: Copyright © 2021 Kalkine Media

Good Read: What is plaguing ASX-listed iron ore miners?

The base metal is mined in around 50 countries. Australia is the leading exporter of the metal, which is used in almost every industry.

A robust global economic recovery is the primary driver for its demand and supply. With growing economic activities, the demand for steel in construction also increases, which in turn increases the prices.

China is the leading consumer of iron ore in the world. The increase in demand for iron ore in China has skyrocketed the price of the commodity to record highs, this clearly indicates the trend of the country’s economic health. 

Why are steel prices surging?

Strong demand and higher iron ore prices coupled with China’s production curbs have fuelled the surge in domestic steel prices. Notably, the top steel-producing country had imposed limits on production in March this year to lower the country’s carbon emissions.

Source: © Lkeskinen0 | Megapixl.com

Though steel prices in China started soaring at the beginning of the year, the rally gained momentum in May after an abrupt surge in demand post the Labour Day holiday. Last month, the producers started to replenish steel stocks.

The rebar prices increased to CNY6,000 per tonne in May, reflecting an increase of around CNY600 per tonne from April-end.

Globally, steel prices were hovering near the all-time high levels due to a steep rise in iron ore prices and strong demand from the US, China, India, Europe, and other developing economies.

Must Read: Why are iron ore prices volatile of late?

Which sectors are being impacted?

The construction and automotive sectors are the main consumers of steel. Both the industries were hit hard by the coronavirus-led supply chain disruptions. With skyrocketing steel prices, they are likely to brace for another hit.

Source: © A_poselenov | Megapixl.com

The prices of vehicles and construction goods are bound to be affected by soaring steel prices, as steel is the primary raw material for these industries.

As the construction cost has increased by 3% to 5%, profit margins of real estate developers have also gone down.

Meanwhile, leading automakers across the globe including Nissan Motors, Toyota, Maruti Suzuki, Volvo and MG Motors have announced plans to increase the prices of their vehicles this year.

Interesting Read: What's heating up the Australian property market? Three ASX stocks to look at

Comment


Disclaimer