Iron ore use
As described in the previous part of this series, demand for iron ore is derived from the demand for steel. In turn, steel is widely used in construction and other applications. It ultimately impacts the share prices of companies like Rio Tinto (RIO), BHP Billiton (BHP), Vale (VALE), and Cliffs Natural Resources (CLF), which make up part of the iShares S&P Global Materials sector Index FUND (MXI).
Steel and stage of economic development
The use of steel, and iron ore, also depends on the level of development of a particular economy. Developing countries like China and India consume much more steel as compared to other countries that are less developed. Steel consumption per capita is one of the major indicators of the level of development of a country. In 2011, the world’s average consumption of finished steel stood at 215 kilograms per capita, against a very low of 35 kilograms per capita for Africa, 57 kilograms per capita for India, 123 kilograms per capita for Brazil, 460 kilograms per capita for China, and 506 kilograms per capita for Japan. Gross domestic product (or GDP) per capita and steel usage per capita has a very dynamic relationship. Before economic take-off, the level of use is very low. Then, there’s a rapid increase. It reaches a stage of GDP per capita, where steel use starts leveling off and finally declines. The GDP per capita increases before finally stabilizing at a point.
The previous chart shows the same relationship for developed countries like the U.S., Germany, Japan, and Korea. It shows the level of demand that’s still lying dormant for the countries like China and India. China has started to climb the steel demand curve, while India is just taking-off. Structurally, steel use is here to stay because a developing economy need things like real estate, infrastructure, automobiles—which are all steel intensive.