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No bottom yet for iron ore prices

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Iron ore prices

We already saw that steel prices have fallen to their lowest level since mid-2009. Steel prices in the United States are down ~30% since the start of last year. But the rout in iron ore prices has been even more severe.

Iron ore prices fell by more than half over this same period. Iron ore is the primary raw material for steel producers that use traditional blast furnaces. ArcelorMittal (MT) and U.S. Steel Corporation (X) produce most of their steel through blast furnaces.

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Movement in iron ore prices

The above chart shows the movement in iron ore prices. Iron ore prices have corrected more than ~12% so far in 2015. Almost all iron ore that’s mined is used for making steel. The weakness in iron ore prices is a reflection of demand slowdown in the steel industry.

The addition of fresh capacity by mining giants such as Rio Tinto (RIO) and Vale S.A. (VALE) has increased the supply of iron ore in markets. This has also put pressure on iron ore prices.

Integrated operations

Integrated steel producers such ase ArcelorMittal and U.S. Steel have iron ore mining operations as well. These companies are negatively impacted by the fall in iron ore prices. The profitability of their mining operations goes down if iron ore prices drop.

AK Steel (AKS) sources most of its iron ore from third parties. It stands to benefit from lower iron ore prices. Currently, AK Steel forms 3.06% of the SPDR S&P Metals and Mining ETF (XME).

Steel scrap is another major raw material for steel companies. In the next part, we’ll see how steel scrap prices have played out so far in 2015.

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