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Will Steel Companies Benefit from Slide in Iron Ore Prices?

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Apr. 11 2015, Updated 1:05 a.m. ET

Iron ore prices

Previously, we saw that steel prices have fallen to their lowest levels since mid-2009. In this part, we will analyze the latest trend in iron ore prices. Iron ore prices are a key metric investors in steel plays should watch. Iron ore is the primary raw material for steel producers using traditional blast furnaces. ArcelorMittal (MT) and US Steel (X) produce most of their steel through blast furnaces. US Steel currently forms 0.57% of the iShares US Basic Materials ETF (IYM).

Almost all of iron ore that is mined is used for making steel. The SPDR S&P Metals and Mining ETF (XME) has invested in some of the iron ore mining companies. Compass Minerals (CMP) forms 4.7% of XME.

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Prices slide further

The previous chart shows the movement in iron ore price. Iron ore prices have corrected ~30% so far in 2015. Iron ore prices fell by almost half in 2014. The weakness in iron ore prices is a reflection of demand slowdown in the steel industry.

The addition of fresh capacity by mining giants like Rio Tinto (RIO) and Vale (VALE) has increased the supply of iron ore in markets, which has also put pressure on iron ore prices.

Integrated operations

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

AK Steel (AKS), which sources most of its iron ore from third parties, stands to benefit from lower iron ore prices.

Steel companies like Nucor (NUE) use steel scrap as the primary raw material. We’ll discuss the latest trends in steel scrap prices in our next part.

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