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What Determines the Iron Ore Price?

Issued at 2012-06-14



This is a rather important matter for those who invest in in commodities: what is it that determines the iron ore price? Of course, at one level that’s simple: supply and demand. But we’d rather like to know more than that, which are the important elements of the supply and demand?

The FT’s Alphaville has a pair of posts that tell us a lot of what we need to know: however, they miss out one very important factor. Here and here for their posts.

In terms of supply yes, there are a lot of projects coming online. But the swing producers seem to be the Chinese ones and unless just every project comes online it’s unlikely that prices will go below $120 per tonne. Assuming demand holds up of course: and there the big determinant is the urbanisation of China. As long as that continues then steel demand will hold up and thus so will iron ore prices.

Except, except: the measurement being used is of steel production. Which is not the same as iron ore consumption: for some steel is made of recycled steel, not from iron ore. So we have another thing to think about, how much steel scrap is China going to generate internally? To begin with, now, not a great deal. For they are building that first stage of the urban infrastructure. There just isn’t very much steel in the little that they’re tearing down to be replaced by modern cities, railroads and so on.

Yet as a society advances and that first stage of industrialisation is removed to make way for second and third waves then steel demand may go one way but iron ore demand another. For there will be a greater supply of the scrap that displaces the ore.

Sadly there’s no good numbers on the details of this process. It’s really only in the last twenty or thirty years that we’ve been able to use scrap to make almost any new steel and that’s just not long enough for us to be able to forecast the cycle of scrap replacing ore. We can see what happened in the US, certainly, but we don’t know whether that was the scrap/ore cycle or the introduction of the new smelting processes.

My gut feel, which is far as I think we can take it on the numbers available, is that the iron ore price is more fragile than a look at purely steel demand would show us. For at some point it will be true that the demand for virgin ore will be at least partially displaced by the growing supply of scrap.

 


Source: Forbes



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