2019 Global Iron Ore Prices: A Case of Supply and Demand

2019 Global Iron Ore Prices: A Case of Supply and Demand

2019 Global Iron Ore Prices

A Case of Supply and Demand

Throughout calendar 2019, a multitude of factors in an interdependent global marketplace has led to changes in the structure and dynamic of Iron Ore exports and prices on a global scale, as well as affecting domestic suppliers.  

Historically, Australia has been the largest exporter of Iron Ore. The FY18 saw 849 Million tonnes exported, worth a significant A$61 billion. China was responsible for receiving 83% of our domestic exports of iron ore, followed by Japan at 8% and South Korea at 6%. Chinese demand continues to play the dominant hand in driving the recent spike in price per tonne of the commodity.

China’s crude steel production rose 12.7% in April from March, its highest monthly level on record. Most of this increase has been driven by Australian Exports of Iron Ore as a raw input in chinese steel production. This led investors to speculate that there would be a surge in the price of Australian iron ore exports, and with the price per tonne currently at $107.54 USD (as of June 21 at market close), the price per tonne had reached its highest point since May 2014.

China’s peak steel production “season” has historically seen a spike throughout the months of March and September. This is also supportive of the increase in bulk commodity prices.

Another factor of the recent price surge may be attributed to the suffocated supply of iron ore from the world’s second largest exporter, Brazil. Brazil took out 21.6% of the global Iron Ore exports in FY18. Vale SA (NYSE: VALE) is one of the worlds largest Iron Ore miners and is a Brazilian multinational corporation engaged in metals and mining and one of the largest logistics operators in Brazil.

In January, the company’s tailings dams burst and subsequently resulted in the death of over 300 people and the suspension of all mine operations, which was lifted in April under strict conditions. Resultant of the tragedy, VALE’s share price took a -24.63% decline in the 3 days following. However, the mine was suspended again in the Brazilian courts – representing a major supply blow globally as Brucutu is Brazil’s second largest mine.

Atop this, Vale’s impact on the decrease in global output cannot be reversed by diverting resources to domestic mining campaigns, as it has stated that its Australian mines are already running at capacity. Additionally, BHP announced in its quarterly earnings in April to cut production levels, due to Cyclone Veronica disrupting operations in Queensland.

This humanitarian crisis in combination with China’s ferocious steel production growth would have played a role in the rapid price growth of iron ore globally.

Furthermore, between March 18 & March 31, Cyclone Veronica caused some of the largest domestic iron ore miners to close operation for the duration. Fortescue Metals Group’s (ASX: FMG) Port Hedland had to be closed for five days, they also experienced flooding at their railway line near the port. BHP Billiton (ASX: BHP) reported that its production was lowered by 6-8 Million tonnes from the unpreventable weather. This has further restricted the supply of Iron Ore this calendar year.

In the wider political scene, trade wars and diversion between the economic giants China and the United States continue to rage on, and if President Trump were to ramp up his tariffs on Chinese imports, Australian iron ore risks exposure to lower demand, due to a potential slowing of Chinese growth.

Inline with the significant price increases over the mid-term, Australian iron ore shares have grown rapidly over the same period. The eight largest iron ore companies on the ASX (BCI, BHP, CIA, FMG, GRR, IRD, MGX, RIO) over one year have averaged growth of 56.13% (24 June 2018 – 24 June 2019). The same group of companies averages an additional 2.7% dividend growth p.a.

With constricted supply and increased demand for Australian iron ore exports, the commodity’s bullish price run will continue to support domestic operators in the economy, supporting net export growth and as such, trickle through to support struggling GDP gains.

By William Banham

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